Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick
Abstract This paper proposes a new predictor by calculating the difference between the Japanese candlestick’s upper and lower shadows (ULD) constructed from CBOE volatility index (VIX) data. ULD is a powerful predictor for future stock returns, and higher ULD leads to the subsequent decline of stock...
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| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
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SpringerOpen
2025-01-01
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| Series: | Financial Innovation |
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| Online Access: | https://doi.org/10.1186/s40854-024-00682-8 |
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| author | Zhifeng Dai Haoyang Zhu Xiaoming Chang Fenghua Wen |
| author_facet | Zhifeng Dai Haoyang Zhu Xiaoming Chang Fenghua Wen |
| author_sort | Zhifeng Dai |
| collection | DOAJ |
| description | Abstract This paper proposes a new predictor by calculating the difference between the Japanese candlestick’s upper and lower shadows (ULD) constructed from CBOE volatility index (VIX) data. ULD is a powerful predictor for future stock returns, and higher ULD leads to the subsequent decline of stock returns. Our results show that our new predictor generates R^2 values of up to 2.531% and 3.988% in-sample and out-of-sample, respectively; these values are much larger than the previous fundamental predictors. Moreover, the predictive information contained in ULD can help mean–variance investors achieve certainty equivalent return gains of as high as 327.1 basis points. Finally, the extension analysis and robustness tests indicate that recession is the primary cause of return predictability; our results are robust under different settings. |
| format | Article |
| id | doaj-art-42a0cc343e9b4813b542a9f3b0dfec2d |
| institution | Kabale University |
| issn | 2199-4730 |
| language | English |
| publishDate | 2025-01-01 |
| publisher | SpringerOpen |
| record_format | Article |
| series | Financial Innovation |
| spelling | doaj-art-42a0cc343e9b4813b542a9f3b0dfec2d2025-01-05T12:43:34ZengSpringerOpenFinancial Innovation2199-47302025-01-0111113510.1186/s40854-024-00682-8Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestickZhifeng Dai0Haoyang Zhu1Xiaoming Chang2Fenghua Wen3College of Mathematics and Statistics, Changsha University of Science and TechnologyCollege of Mathematics and Statistics, Changsha University of Science and TechnologyCollege of Mathematics and Statistics, Changsha University of Science and TechnologyCollege of Business, Central South UniversityAbstract This paper proposes a new predictor by calculating the difference between the Japanese candlestick’s upper and lower shadows (ULD) constructed from CBOE volatility index (VIX) data. ULD is a powerful predictor for future stock returns, and higher ULD leads to the subsequent decline of stock returns. Our results show that our new predictor generates R^2 values of up to 2.531% and 3.988% in-sample and out-of-sample, respectively; these values are much larger than the previous fundamental predictors. Moreover, the predictive information contained in ULD can help mean–variance investors achieve certainty equivalent return gains of as high as 327.1 basis points. Finally, the extension analysis and robustness tests indicate that recession is the primary cause of return predictability; our results are robust under different settings.https://doi.org/10.1186/s40854-024-00682-8Stock returnsThe Japanese candlestickCBOE volatility index fundamental predictors |
| spellingShingle | Zhifeng Dai Haoyang Zhu Xiaoming Chang Fenghua Wen Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick Financial Innovation Stock returns The Japanese candlestick CBOE volatility index fundamental predictors |
| title | Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick |
| title_full | Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick |
| title_fullStr | Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick |
| title_full_unstemmed | Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick |
| title_short | Forecasting stock returns: the role of VIX-based upper and lower shadow of Japanese candlestick |
| title_sort | forecasting stock returns the role of vix based upper and lower shadow of japanese candlestick |
| topic | Stock returns The Japanese candlestick CBOE volatility index fundamental predictors |
| url | https://doi.org/10.1186/s40854-024-00682-8 |
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