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The Baltic Dry Index as a Predictor: Analyzing its Impact on Global Stock Returns, Commodity Returns, and Economic Activity

Last Updated on 10 February, 2024 by Rejaul Karim

The paper “The Baltic Dry Index as a Predictor of Global Stock Returns, Commodity Returns, and Global Economic Activity” by Gurdip Bakshi, George Panayotov, and Georgios Skoulakis investigates the potential predictive power of the Baltic Dry Index (BDI) growth rate on a range of stock markets.

The authors conduct in-depth in-sample tests and out-of-sample analyses to showcase the economic significance of stock return predictability, as evidenced by the examination of certainty equivalent returns and Sharpe ratios of portfolio strategies that utilize the BDI growth rate.

Additionally, the BDI growth rate is found to predict returns of commodity indexes and demonstrate joint predictability of stock and commodity returns within a system of predictive regressions. Lastly, the BDI growth rate is connected to the growth of global economic activity, reinforcing its role in revealing the link between real and financial sectors.

This research offers valuable insights into the potential application of the BDI growth rate in forecasting global stock and commodity returns, as well as global economic activity.

Abstract Of Paper

The goal of this paper is to show that the growth rate of the Baltic Dry Index (BDI) has predictive ability for a range of stock markets, which is demonstrated through in-sample tests and out-of-sample statistics.

The documented stock return predictability is also of economic significance, as seen by examining the certainty equivalent returns and Sharpe ratios of portfolio strategies that exploit the BDI growth rate. In addition, the BDI growth rate predicts the returns of commodity indexes, and we find some evidence for joint predictability of stock and commodity returns in a system of predictive regressions. Finally, the BDI growth rate predicts the growth in global economic activity, establishing further BDI’s role in revealing a link between the real and financial sectors.

Original paper – Download PDF

Here you can download the PDF and original paper of The Baltic Dry Index as a Predictor of Global Stock Returns, Commodity Returns, and Global Economic Activity.

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Author

Gurdip Bakshi
Temple University – Fox School of Business and Management; Fox School of Business

George Panayotov
Hong Kong University of Science & Technology (HKUST)

Georgios Skoulakis
University of Piraeus – Department of Banking and Financial Management

Conclusion

In conclusion, the paper “The Baltic Dry Index as a Predictor of Global Stock Returns, Commodity Returns, and Global Economic Activity” by Gurdip Bakshi, George Panayotov, and Georgios Skoulakis demonstrates the significant predictive ability of the Baltic Dry Index (BDI) growth rate on a diverse range of stock markets.

The research highlights the economic importance of stock return predictability through the examination of certainty equivalent returns and Sharpe ratios associated with portfolio strategies that capitalize on the BDI growth rate.

Moreover, the BDI growth rate is shown to predict commodity index returns, with evidence of joint predictability in stock and commodity returns using a system of predictive regressions. The paper also establishes the BDI growth rate’s connection to the growth in global economic activity, emphasizing its role in uncovering the relationship between real and financial sectors.

This study offers critical insights and implications for investors and policymakers seeking to understand the predictive power of the BDI growth rate in global stock, commodity, and economic developments.

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FAQ

Q1: What is the primary focus of the paper, and what does it investigate regarding the Baltic Dry Index (BDI)?

The paper focuses on exploring the predictive power of the growth rate of the Baltic Dry Index (BDI) across a range of stock markets. It investigates the BDI’s ability to forecast global stock returns, commodity returns, and global economic activity.

Q2: How does the paper demonstrate the economic significance of stock return predictability using the BDI growth rate?

The economic significance of stock return predictability is showcased through the examination of certainty equivalent returns and Sharpe ratios associated with portfolio strategies that leverage the BDI growth rate. This analysis helps illustrate the practical impact of utilizing the BDI growth rate in stock return predictions.

Q3: In addition to stock returns, what other financial and economic variables does the BDI growth rate predict, according to the findings of the paper?

The BDI growth rate is found to predict returns of commodity indexes. Furthermore, there is evidence of joint predictability in stock and commodity returns within a system of predictive regressions. Additionally, the paper establishes a connection between the BDI growth rate and the growth in global economic activity, emphasizing its role in revealing links between the real and financial sectors.

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