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Lina Franziska Lautner1, Tom L. Dudda2, Tony Klein1
1Technische Universität Chemnitz, Germany; 2Technische Universität Dresden, Germany
Discussant: Tobias Lorenz Neumaier (University of Bremen)
We study the drivers of the level, slope, and curvature of the term structure of European carbon futures. We find that commercial hedging open interest predicts changes in the carbon term structure. Speculative positions held by financial investors---which have grown in recent years---and alternative measures of financial speculation have no predictive value. Additionally, the ratio of natural gas to coal prices predicts changes in the term structure level, while crude oil and equity returns correlate with future changes in its slope and curvature. Our results suggest that futures prices of European Emission Allowances are primarily driven by hedging demand from firms covered under the EU Emissions Trading Scheme, whereas financial speculation plays a comparatively minor role.
2:30pm - 3:00pm
Are there fences in the global factor zoo?
Merlin Bartel1, Sebastian Stöckl1, Joshua Traut2
1Universität Liechtenstein, Liechtenstein; 2Universität St. Gallen, Schweiz
Discussant: Lina Franziska Lautner (Technische Universität Chemnitz)
We revisit the established dominance of local factors in international asset pricing by examining the predictability anomalies through the lens of factor momentum signals. Differing from previous results for asset pricing models where local factors are typically seen as superior to regional and global factors, our research reveals that regional and global signals surpass local signals in forecasting factor risk premiums. Investment strategies formed on non-local signals generally outperform strategies formed on local signals in all considered metrics. This outperformance is more pronounced for factors and regions with high structural integration. Non-local factor predictability potentially improves leading asset pricing models. Moreover, non-local signals revive momentum investing in markets previously thought to lack momentum opportunities, such as Japan.
3:00pm - 3:30pm
The Devil in the Details: A Multiverse View of Pockets of Predictability
Nusret Cakici1, Christian Fieberg2, Tobias Lorenz Neumaier3, Thorsten Poddig3, Adam Zaremba4
1Gabelli School of Business, Fordham University; 2HSB Hochschule Bremen - City University of Applied Science; 3University of Bremen; 4MBS School of Business, Poznan University of Economics and Business, and Monash University
Discussant: Merlin Bartel (University of Liechtenstein)
The growing complexity of forecasting models increases the number of decision nodes in the research process, raising the risk of overfitting to specific design choices. We illustrate this issue using the recent concept of “pockets of predictability,” which posits that return predictability is time-varying and that short windows of high predictability can be identified ex-ante. In this study, we reassess the robustness and practical applicability of this approach. By analyzing 19,440 variations of the original methodology, we find that its effectiveness depends critically on various seemingly minor methodological decisions. Furthermore, return predictability has declined significantly in recent decades, and the potential economic gains are highly sensitive to trading costs. Overall, strategies based on pockets of predictability should be approached with caution.
