The Baltic Dry Index as a Predictor of Global Stock Returns, Commodity Returns, and Global Economic Activity
University of Maryland - Robert H. Smith School of Business
Hong Kong University of Science & Technology
University of British Columbia (UBC) - Division of Finance
January 26, 2011
AFA 2012 Chicago Meetings 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.
Number of Pages in PDF File: 52
Keywords: Baltic Dry Index, global stock markets, commodity returns, global real economic activity, predictive regressions, out-of-sample statistic, economic significance
JEL Classification: C23, C53, G11, G12, G13, C5, D24, D34working papers series
Date posted: March 22, 2011
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