Predictability and underreaction in industry-level returns: Evidence from commodity markets

Victor (Vic) Valcarcel, Andrew J. Vivian and Mark Wohar ()

Journal of Commodity Markets, 2017, vol. 6, issue C, 1-15

Abstract: This paper finds significant evidence that commodity log price changes can predict industry-level returns for horizons of up to six trading weeks (30 days). We find that for the 1985–2010 period, 40 out of 49 U.S. industries can be predicted by at least one commodity. Our findings are consistent with Hong and Stein’s (1999) “underreaction hypothesis.” Unlike prior literature, we pinpoint the length of underreaction by employing daily data. We provide a comprehensive examination of the return linkages among 25 commodities and 49 industries. This provides a more detailed investigation of underreaction and investor inattention hypotheses than most related literature. Finally, we implement data-mining robust methods to assess the statistical significance of industry returns reactions to commodity log price changes, with precious metals (such as gold) featuring most prominently. While our results indicate modest out-of-sample forecast ability, they confirm evidence that commodity data can predict equity returns more than four trading weeks ahead.

Keywords: Asset pricing; Commodity markets; Equity markets; Industry-level returns; Information and market efficiency; Predictability; Out-of-sample forecast ability, Underreaction (search for similar items in EconPapers)
JEL-codes: E44 G12 G14 G15 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S240585131630157X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:6:y:2017:i:c:p:1-15

DOI: 10.1016/j.jcomm.2017.02.003

Access Statistics for this article

Journal of Commodity Markets is currently edited by Marcel Prokopczuk, Betty Simkins and Sjur Westgaard

More articles in Journal of Commodity Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().