Finance: Swansea University Research Excellence Scholarship: Using Quantile Regressions to Obtain Skewness and Forecast Stock Returns

Closing date: 22 January 2018

Key Information

Swansea University Research Excellence Scholarships (SURES)

Swansea University is proud to offer 15 fully-funded PhD scholarships for students commencing study in October 2018 or January 2019.

The scholarships will be awarded on the basis of student excellence across a portfolio of 34 potential projects.

Project title: Using Quantile Regressions to Obtain Skewness and Forecast Stock Returns

Start date: October 2018

Summary and relevant literature

Prior literature documents a negative relation between variables directly or indirectly related to cross-sectional variations in future skewness and stock returns (Boyer et al., 2010; Bali et al., 2011; Boyer and Vorkink, 2014; and Conrad et al., 2014). We calculate density forecasts from quantile regressions and obtain an estimate of the physical skewness of an asset’s future return distribution.

Research questions and methodology

Specifically, we follow Aretz and Arisoy (2016) and employ panel-data quantile regressions of the future stock returns on lagged predictor variables. We obtain the first three return moments based on the fitted quantile regression values and then calculate stock-specific skewness. We also compare the predictability of our skewness forecasts with other variables in the literature implicitly or explicitly associated with skewness. For example, Neuberger (2012) introduces a realized physical skewness measure using both stock and option prices. And Conrad et al. (2014) propose a logit model by assuming a lottery-like future return. Lastly, we form portfolios and run Fama-MacBeth (1973) regressions using the skewness estimates as pricing variables.

Data

We will acquire daily stock prices and the relevant variables from COMPUSTAT. Daily option prices will be obtained from OptionMetrics. We will also obtain data about the market return, SMB, HML, MOM, and the risk-free rate from Kenneth French's website.

References

  • Aretz, K. and Arisoy, Y. E., 2016. Do stock markets price expected stock skewness? New evidence from quantile regression skewness forecasts. Working Paper, University of Manchester and University of Paris-Dauphine.
  • Bali, T. G., Cakici, N. and Whitelaw, R. F., 2011. Maxing out: Stocks as lotteries and the cross-section of expected returns. Journal of Financial Economics 99, 427-446.
  • Boyer, B., Mitton, T. and Vorkink, K., 2010. Expected idiosyncratic skewness. Review of Financial Studies 23, 169-202.
  • Boyer, B. and Vorkink, K., 2014. Stock options as lotteries. The Journal of Finance 69, 1485-1528.
  • Conrad, J., Kapadia, N. and Xing, Y., 2014. Death and jackpot: Why do individual investors hold overpriced stocks? Journal of Financial Economics 113, 455-475.
  • Fama, E. F. and MacBeth, J. D., 1973. Risk, return, and equilibrium: Empirical tests. Journal of Political Economy 71, 607-636.
  • Neuberger, A., 2012. Realized skewness. Review of Financial Studies 25, 3423-3455.

Supervisors / Academic Contacts: Dr Yuzhi Cai / Dr Rui Fan

The successful applicant will have access to our Postgraduate Research Student Training programmes.

Eligibility

Candidates should have (or expect to obtain) a first class honours degree (or equivalent) and/or a master's degree with dostinction in finance, statistics, mathematics or a related subject.

Programming skills for R (or Matlab, C++, etc.) are required.

Due to funding restrictions, this scholarship is open to UK/EU candidates only.

Funding

The scholarship covers the full cost of UK/EU tuition fees and an annual stipend of £14,553 for 3 years. 

There will also be £1,000 per annum available for research expenses such as travel, accommodation, field trips and conference attendance.

How to Apply

To apply please complete and return the following documents to Dr Vivienne Jenkins (pgrsures@swansea.ac.uk) quoting reference COMAN2:

Student applications will be evaluated against the following criteria:

  • Literary and Academic attainments (60%)
  • Demonstrable esteem indicators i.e. ambassadorial skills, instincts and opportunities to demonstrate leadership, experience and interest in extracurricular and community activities (40%)