John Cotter: Crash Narratives and Predictability
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A/EW105, Alcuin East Wing, Campus West, University of York (Map)
Event details
Author: John Cotter (UCD)
Abstract: This paper documents the superior predictive power of recently proposed Crash Narrative Index for US stock market total and downside volatility. Compared to other volatility predictors, the Crash Narrative Index performs better during high-volatility and low-sentiment periods. Employing a look-ahead bias–free approach, we find that the Crash Narrative Index generates more accurate out-of-sample forecasts of both total and downside volatility. Building on these forecasts, we develop volatility- and downside volatility–managed trading strategies that produce significantly large after-cost alphas and Sharpe ratios, with cumulative returns 57% higher than the buy-and-hold benchmark. Furthermore, incorporating the Crash Narrative Index also improves the performance of fixed-weight strategies for real-time investors.
Host: Mark Hallam (York)
Cluster: Macro Finance