Financial Turbulence and Aggregate Stock Returns

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Stöckl, S. (2016). Financial Turbulence and Aggregate Stock Returns. Presented at the 29th Australasian Finance & Banking Conference, Sydney, Australia.

Publication type

Presentation at Scholarly Conference


In this paper I show that financial turbulence (FT) is as strong a predictor for the equity premium as is the short interest index (SII), which is the best performing predictor up to date (Rapach et al. 2016). However, FT has the advantage of not needing external (fundamental) information for its calculation, as it depends solely on the distribution of the cross-section of stock returns. Additionally, FT is amongst the strongest predictors of future volatility both in-sample as well as out-of-sample. Combining these two findings, I show that a mean-variance investor relying on predictions from FT outperforms all other predictor variables in terms of Sharpe ratios and achieves annualized certainty equivalent returns of 7.78%. I also show that high levels of FT induce higher amounts of trade in financial markets, which can be attributed to investors rebalancing their portfolios after learning that returns are more “turbulent” than expected.


Organizational Units

  • Chair in Finance
  • Institute for Finance