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This paper studies the predictability of implied volatility indices of stocks using financial reports tone disagreement from U.S. firms. For this purpose, we build a novel measure of tone disagreement based on financial report tone synchronization of U.S. corporations scattered across five Fama-French industries. The research uses tree network methods to calculate the minimum spanning tree length utilizing data from text mining sentiments features extracted from all U.S. firms that considers 837,342 financial reports. The results show that periods of increased disagreement predict higher implied volatility indices. We contribute to the literature that proposes that a high level of expectations dispersion leads to higher stock volatility and fills a gap in understanding how firms' disagreement level of financial report tone forecast the aggregate stock market behavior. The findings also have implications for financial stability and delegated portfolio management, as accurate volatility prediction is critical for practitioners. [ABSTRACT FROM AUTHOR]

This paper tests the random walk hypothesis in the cryptocurrency market. Based on the well-known Meese–Rogoff puzzle, we evaluate whether cryptocurrency returns are predictable or not. For this purpose, we conduct in-sample and out-of-sample analyses to examine the forecasting power of our model built with autoregressive components and lagged returns of BITCOIN, compared with the random walk benchmark. To this end, we considered the 13 major cryptocurrencies between 2018 and 2022. Our results indicate that our models significantly outperform the random walk benchmark. In particular, cryptocurrencies tend to be far more persistent than regular exchange rates, and BITCOIN (BTC) seems to improve the predictive accuracy of our models for some cryptocurrencies. Furthermore, while the predictive performance is time varying, we find predictive ability in different regimes before and during the pandemic crisis. We think that these results are helpful to policymakers and investors because they open a new perspective on cryptocurrency investing strategies and regulations to improve financial stability. [ABSTRACT FROM AUTHOR]

It is well-known that the weighted averages of two competing forecasts may reduce mean squared prediction errors (MSPE) and may also introduce certain inefficiencies. In this paper, we take an in-depth view of one particular type of inefficiency stemming from simple combination schemes: Mincer and Zarnowitz inefficiency or auto-inefficiency for short. Under mild assumptions, we show that linear convex forecast combinations are almost always auto-inefficient, and, therefore, greater reductions in MSPE are almost always possible. In particular, we show that the process of taking averages of forecasts may induce inefficiencies in the combination, even when individual forecasts are efficient. Furthermore, we show that the so-called "optimal weighted average" traditionally presented in the literature may indeed be inefficient as well. Finally, we illustrate our findings with simulations and an empirical application in the context of the combination of headline inflation forecasts for eight European economies. Overall, our results indicate that in situations in which a number of different forecasts are available, the combination of all of them should not be the last step taken in the search of forecast accuracy. Attempts to take advantage of potential inefficiencies stemming from the combination process should also be considered. [ABSTRACT FROM AUTHOR]

In this paper, we present a new asymptotically normal test for out-of-sample evaluation in nested models. Our approach is a simple modification of a traditional encompassing test that is commonly known as Clark and West test (CW). The key point of our strategy is to introduce an independent random variable that prevents the traditional CW test from becoming degenerate under the null hypothesis of equal predictive ability. Using the approach developed by West (1996), we show that in our test, the impact of parameter estimation uncertainty vanishes asymptotically. Using a variety of Monte Carlo simulations in iterated multi-step-ahead forecasts, we evaluated our test and CW in terms of size and power. These simulations reveal that our approach is reasonably well-sized, even at long horizons when CW may present severe size distortions. In terms of power, results were mixed but CW has an edge over our approach. Finally, we illustrate the use of our test with an empirical application in the context of the commodity currencies literature. [ABSTRACT FROM AUTHOR]