CATLICA LISBON SCHOOL OF BUSINESS & ECONOMICS

Empirical Finance
Group Assignment 1
Bernd Edelmann

n 152415001

David Ferro

n 152415041

Mariana Ferro

n 152415055

Rafael Belo

n 152415038
24/02/2016

Abstract
In the present paperwork we first present three stylized facts and test them for the DAX 30
index returns. The results obtained are in some way, but not totally, aligned with what is
described in literature, showing that stylized facts may not hold under certain circumstances.
Then, we attempt to build a model for the prediction of equity premiums, using the US
unemployment rate as predictive variable. However, we find that this is not a robust predictor
of stock returns. After, we address whether idiosyncratic stock volatilities follow a random
walk, as stated in existent papers, or not. Our findings, from tests applied to 150 US stocks,
reject this hypothesis. Finally, we analyze Griffin, Hirschey and Kelly study on the impact of
financial media in global markets. From this scrutiny we try to elaborate new ideas based on
this paper. We focused particularly on possible implications of the earnings announcement
order.

Empirical Finance

Group Assignment 1

1. Introduction
The purpose of this essay is to perform a practical examination of several empirical
facts while developing our innovative thinking when approaching new subjects.
Section 2 covers three stylized facts, which are a set of properties that have been found
across a wide range of instruments, markets and time periods, and that are accepted to
be empirical truths. Due to their generality, they are perceived as being of qualitative
nature, and may sometimes be inaccurate in detail.
The first stylized fact is the absence of autocorrelation, i.e. linear autocorrelations of
asset returns in a time series are usually insignificant, except for higher time frequencies
( 20 minutes). This has been widely documented and it supports the efficient market
hypothesis, as otherwise if price changes exhibited significant correlation one could
easily profit from arbitrage strategies. However, for higher time scales, namely weekly
and monthly returns, the absence of autocorrelation does not always hold.
The second stylized fact analyzed is Aggregational Gaussianity. It states that as the time
lag between returns increase, the returns distribution becomes more similar to a normal
distribution. We will try to assess to what extent the increase in the frequency (

under which returns are calculated, has influence on the shape of its distribution.
Finally the third stylized fact is the leverage effect, which highlights a negative
correlation between an asset past returns and future squared returns (a proxy for
volatility).
Section 3 covers the prediction of equity premiums and stock market returns, using
diverse methods, variables and time periods. Such variables, like dividend-price ratios,
earnings-price ratios and dividend-earnings ratios used to be broadly accepted as
financial predictors as their statistical significance was backed up by a collection of
studies and articles. However, Goyal and Welch in their paper A comprehensive look at
the empirical performance of equity premium prediction (2008), revised models since
2006 and found evidence that most of them were not firm and even erroneous.
Considering that, we now try to find a robust (out of sample) predictor for equity
premiums.
Section 4 questions whether idiosyncratic stock volatilities follow a random walk.
Idiosyncratic volatility, or idiosyncratic risk, is risk that is uncorrelated with the market
1

Empirical Finance

Group Assignment 1

risk. This means that idiosyncratic refers to the fact that the risk is due to individual,
firm specific factors that do not depend on the overall market risk, which is why it is
also commonly referred to as firm specific risk. The random walk hypothesis was
introduced by Louis Bachelier, and analyzed and discussed in detail in many following
papers. It is often visualized by an inebriated mans movement on the way, for example,
home: assuming a straight line home, each random step away from the shortest line
averages out to zero that is, to get home, any deviation to either side has to be
equalized by movement in the exactly opposite direction.
Section 5 covers the study of Griffin, Hirschey and Kelly: How Important is the
Financial Media in Global Markets? (2011). It addresses the relation between news
announcements and stock price movements and tries to explain the differences across
developed and emerging markets. They examine several hypotheses, such as insider
trading, differences in the quality of the news dissemination mechanism, peer firms
news announcements and accounting quality. We first summarize their research and
findings and then suggest an idea for further future academic studies.

2. DAX 30 returns - Stylized facts empirical testing

A. Data
The figures used for calculations were extracted from Thomson Reuters Eikon, and
refer to the returns of the German stock market DAX 30. Sample size for the first
stylized was determined by setting the same period for every time scale (since 1987),
except for high-frequency data where only a small time frame is available. In this case
the reasoning was to build samples with at least 2000 observations, in order to get a
representative period and reliable estimations. For the second and third stylized facts we
aimed to find the maximum data available (since 1960).

B. Econometric Methodology
B.1. Absence of autocorrelation
We computed autocorrelations for several time scales and lags, given by:
(1)
2

Empirical Finance
where

Group Assignment 1

are the returns at time t for t time scale, and

in time period (

) in which

are the returns

is the time lag, for the same time scale. Then, we

tested the absence of autocorrelation between the returns through a Ljung-Box test. The
Q-statistic is given by:
(2)
where n is the sample size,

is the sample autocorrelation at lag k and h the number of

lags. The null hypothesis is that autocorrelations up to lag h are statistically equal to
zero. Under

the statistic Q follows a

hypothesis is rejected if:

with h degrees of freedom. The null

Number of lags: It is not clear how to choose the number of lags to estimate
autocorrelations. Many approaches are used: 1) a fixed number; 2) a function of the
noise in the time-series; 3)

; 4) according to the seasonality of the time scale; 5)

. The latter was announced by Box and Jenkins (1970) that have shown that longer lags
estimates are statistically unreliable. This was the approach chosen for our test.
Individual significance tests were also computed. Returns are assumed to be
independent and identically distributed (i.i.d) and consequently the sample
autocorrelations to be asymptotically normal:
(3)
The null hypothesis is that autocorrelation is statistically equal to zero, and the rejection
region, for a significance level of 5%, lies within the following intervals: ]-; -1,96] ;
[1,96; +[ .
B.2. Aggregational Gaussianity
In order to test for Aggregational Gaussianity, a Jarque-Bera test was performed. It
evaluates the third and fourth moment of the normal distribution (Skewness and
Kurtosis). The statistic is asymptotically distributed as a chi-square with two degrees of
freedom. The test is the following:
: returns follow a normal distribution
: returns do not follow a normal distribution

Empirical Finance

Group Assignment 1
(4)

The rejection region relative to a 2 degrees of freedom chi-square lies above 5,9915
(critical value at 5% significance level). As so,

is rejected if

, in which

rejection means that there is evidence against the hypothesis of returns being normally
distributed.

B.3. Leverage effect

For the second stylized fact leverage effect the factor

is given by:
(5)

where

is the number of time lags used and t is the time scale. By conducting an

analysis on

, which is no more than the correlation between the returns and squared

returns, we analyzed different frequencies in order to observe whether it is positive or

negative. Additionally, to prove that a negative correlation actually exists and that it is
different from zero, statistically speaking, all correlations should be tested. The
following t-test was performed assuming that samples are independent and the sample
size (n) is sufficiently large so that the returns are asymptotically normal. The t-statistic
is presented below:

(6)

Having a sample size higher than 25 in every one of the time frequencies used, by the
Central Limit Theorem, we compared our statistic against the critical values of a normal
distribution at 5% significance level.

C. Results
C.1. Absence of autocorrelation
Table 1 presents the estimates from the Ljung-Box statistic and the correspondent
critical values for the time lags in each test. For annual, quarterly and monthly returns,
the Q-statistics are lower than the correspondent critical values, meaning that the null
hypothesis is not rejected, for a significance level of 5%. Therefore, we do not reject the
hypothesis that the correlation between returns is statistically equal to 0, These results
4

Empirical Finance

Group Assignment 1

are consistent with the stylized fact stated. However, it is worth noting that the number
of observations in these samples is small and therefore the results are not as conclusive
as the following tests.
Table 1. The sample period is from 1987 to 2015 for annual to daily returns, from 10-02-2015 to 30-122015 for 30 minutes returns and from 17-11-2015 to 30-12-2015 for 1 minute returns.
Annual

Quarterly

Monthly

Weekly
5 lags

Weekly
6 lags

Weekly
lags

Ljung-Box Stat.

13,7

40,9

Critical Value

16,9

42,6

102,9

9,5

17,7

539,7

109,8

11,1

12,6

410,5

Daily

30 min.

1 min
1 lag

1min
lags

Ljung-Box Stat.
Critical Value

2491,6

1616,0

20,7

1306,9

1866,9

1089,2

3,8

1089,2

For weekly returns and testing only 5 lags, we did not detect the presence of
autocorrelation (Q=9,5 < t=11,1), i.e. the returns of the 1st week of November are not
related with the returns of the 1st week of December, for instance. However, we did find
autocorrelation in the 6th lag, as well as when testing for n/4 lags (Q-statistic > critical
value). A similar conclusion comes when testing for daily returns. Therefore, these
results were not what we expected, but as mentioned in the introduction, the absence of
autocorrelation does not always hold for higher time scales.
For 1 and 30 minutes returns we rejected the null hypothesis (autocorrelation detected),
as expected, and it is found already in the 1-minute returns time series with 1 lag. On
this, we performed individual autocorrelation tests, shown in Figure 1, confirming the
quick decay to zero: in high-frequency data, despite the presence of autocorrelation in
the first ticks, it rapidly decays to zero. Thus, for small time intervals, our results are

Sample autocorrelation

consistent with the stylized fact.

Autocorrelation function of DAX 30 returns

0,03

Upper
Limit

0,02
0,01

Dax 30
Returns

0
-0,01

Lower
Limit

-0,02
0

10
Time lag (minute)

15

20

Figure 1. Autocorrelation function of DAX 30 returns. Time scale: minute.

Empirical Finance

Group Assignment 1

Comparing first-order autocorrelations for the same period but with different time scales
we find a surprising relationship, shown in Table 2, as we expected that as time scale
increase a small autocorrelation would be determined, but for almost all values the
opposite occurred. Also we expected recent data to show smaller autocorrelation, and
again the results showed the opposite. Insufficient observations can be a reason for
these results, but it can be also the data that really exhibits this characteristic.
Table 2. Autocorrelation in daily, weekly and monthly DAX 30 returns.
DAX 30 Returns First-order autocorrelations
sample

daily

weekly

monthly

1988-2001

0,0024

0,0415

0,0244

2002-2015

-0,0189

-0,0615

0,0663

1988-2015

-0,0097

-0,0161

0,0475

C.2. Aggregational Gaussianity

Table 3 highlights the first four moments of all time frequencies used to assess
Aggregational Gaussianity, as well as the results for Jarque-Bera test and the
corresponding p-values.
As one can see, the p-value of annual returns shows very low evidence against the null
hypothesis; we do not reject the hypothesis of annual returns being normally distributed
at 5% significance level. Conversely, the opposite conclusion comes up for the other
time frequencies, for other time frequencies we did find evidence against the null at 5%
significance level, therefore, returns are not normally distributed.
Table 3. First four moments, Jarque-Bera test and corresponding p-values for each time frequency
Annual

Quarterly

Monthly

Weekly

Daily

Average

0,0835

0,0829

0,0585

0,0843

0,0837

Standard Deviation

0,2393

0,2165

0,1955

0,2201

0,2265

Skewness

0,0157

-0,3501

-0,6050

-0,6204

-0,2211

Kurtosis

2,7590

4,4908

5,5143

7,6807

8,6909

JB

0,1354

25,2068

217,3549

1427,4456

9603,3564

0,934557

0,000003

0,000000

0,000000

0,000000

p-value

These findings are aligned with what is described in literature, although it was expected
higher evidence of normality in quarterly and even monthly data.

Empirical Finance

Group Assignment 1

0,6

0,6

0,4

0,4

0,2

0,2

0
-4

-2

-4

-0,2

-0,2

-0,4

-0,4

-0,6
0,6

-0,6

0,6

0,4

0,4

0,2

0,2

-2

0
-4

-2

-4

-0,2

-0,2

-0,4

-0,4

-0,6

-0,6

-2

Figure 2. Q-Q plot (normal distribution quantiles against returns distribution quantiles), in which the
grey line represents the standardized returns and black points represent our data. Panel A represents daily
returns, Panel B monthly returns, Panel C quarterly returns and Panel D annual returns. On the x-axis are
described the z-values and on the y-axis are described the returns.

Additionally, from figure 2, it can be seen that returns are progressively becoming
normal, better fitting the normal distribution line, especially annual returns (Panel D) in
which returns almost never deviate from the normal line.
C.3. Leverage effect
Table 4. Annual, quarterly, monthly, weekly and daily leverage effect and t-Statistic with one time lag.

t-Statistic

Annual

Quarterly

Monthly

Weekly

Daily

-0,1679

-0,1117

-0,1188

-0,1928

-0,1062

-1,2630

-1,6789

-3,0967

-7,4828

-8,9600

Table 4 presents estimates for the leverage factor

with the

and for the t-statistic computed

obtained. From the results obtained we can observe evidence of negative

correlation except for both quarterly and annual time periods. However, leverage effect

Empirical Finance

Group Assignment 1

fact also highlights that the factor

should decrease as

increases. By other terms,

the degree of correlation should diminish as the size of the time lags increases.
In practice it reflects that the degree of correlation of returns today with volatility
tomorrow should be much more significant than the degree of correlation between
todays returns volatility 100 days from the moment. In order to show this decay in the
degree of correlation we computed the correlation with different lags using daily data.
Figure 3. Correlation between daily returns and squared returns for different time lags.

Correlation between returns and squared returns

0,02

Daily Returns

0
-0,02
-0,04
-0,06
-0,08
-0,1
-0,12
0

10

20

30

40

50

60

70

80

90

100

110

Time Lags

As predicted, and bolded by literature there is a tendency for the correlation of returns
with volatility, as the number of lags increases, to stabilize around zero. Correlation is
not exactly zero and perhaps, is even significant due to one of the weaknesses of this ttest. The t-statistic used is extremely influenced by the sample size. Still, the economic
reasoning behind this long time lag does not make so much sense, since the correlation
should be residual after for instance a considerable amount of lags.

3. Unemployment Rate as US stock market predictor

A. Data
In order to test our predictor we chose a 60 year time period (1955 2015) using the
respective monthly data. Regarding our models inputs the figures used extracted from
Kenneth Frenchs website (index values and risk free rate) to perform the calculations
of stock returns and equity premiums. As for the predictor, our choice was the US
unemployment rate and the data was obtained from the Federal Reserve website. We
opted for this variable in order to drift away from financial ratios, exploring the relation
8

Empirical Finance

Group Assignment 1

between a macroeconomic variable (such as unemployment) and stock returns.

Furthermore, it is a major indicator of the labor market, which consequently is an
indicator for the state of the economy. Since changes in the economic environment
impact stock markets, we wanted to explore this relation in our predictive model.

B. Methodology
Our model can be described as a linear regression using the unemployment rate as
independent variable in order to predict the equity premium, our dependent variable.
The regression is described by the following equation:
Equity Premium (t) = + 1 Unemployment rate (t 1) + (t).

(7)

The return prediction was conducted Out-of-Sample (OOS), with an initial estimation
window of 20 years and the regression was computed with both rolling and expanding
windows. It was used to calculate expected returns in each period, readjusting the
regression in each period. Then, these expected returns were compared with the
effective returns in order to compute the models residuals. An OOS forecast implies
also the construction of a benchmark using the historical mean of returns as a predictor
and the computation of the respective square residuals.

C. Results
The performance of our predictor was analyzed through the Goyal and Welch RSquared, which evaluates the difference between the mean squares error residuals of the
prediction model (a) and of the benchmark model (n).
(8)
If the Goyal and Welch R-Square is positive then the prediction model exceeds the
benchmark model in terms of predictive quality. The R-Squared obtained in our model
is negative, both when using a rolling window and an expanding window. The values
obtained are respectively -0.05 and -1.5. Therefore, the prediction model is inferior to
the benchmark model. Consequently, we infer that the unemployment rate is not a
robust predictor of equity premiums.
A final consideration is that one must account for the risks related to predictive data
mining. This analytical process used to explore the data with the objective to find a
relationship between variables and apply it to perform forecasts is subject to several
flaws. Such risks may come from the variables lack of economic and financial
9

Empirical Finance

Group Assignment 1

relevance. The result is a spurious regression that seems to explain the independent
variable within the data sample used but will fail to execute good predictions out-ofsample. In order to better control that risk the dependent variable chosen was a
macroeconomic indicator as so that is has meaning in economical and financial terms.
Also, we applied our model to an out-of-sample data set.
Another issue arises when only selected information, which is not representative of the
whole sample group, is used to elaborate models and perform predictions. In this case
the results obtained will be largely biased. To overcome this problem our model used a
large initial estimation window (1955-1975) using monthly data to increase the number
of observations, and all the information available until the most recent year (2015),
without eliminations. Concluding, there was an effort to attenuate these jeopardies in
order to obtain reliable results.

4. Idiosyncratic Volatilities and the Random Walk Process

A. Data and Methodology
To test the hypothesis, we follow the procedure demonstrated by FU in his paper
Idiosyncratic and the cross-session of expected stock returns as published in the
Journal of Financial Economics (2009).1 To reach a balance of representative and
manageable quantities, 140 stocks listed on the NASDAQ were randomly chosen. Time
series of returns of each of these stocks over the last 15 years (starting January 2nd,
2001) were retrieved from the CRSP (Center for Research in Security Prices) library,
with active trading days ranging from 184 to 3773 days, with 129 stocks having more
than 2500 daily observations.
In order to estimate the returns deviation from the prediction, a regression is run on the
daily excess returns. The independent variables are Fama-Frenchs daily 3 factors
(following equation 2, retrieved from Kenneth R. Frenchs Web Site). 2 The three factors
are the returns of a portfolio composed of firms with high book-to-market ratios versus
those with low book-to-market ratios (HML), a portfolio of small stocks and large
stocks (SMB), with the size referring to each stocks market capitalization), as well as
the markets excess return versus the risk free rate (MRP). This regression is performed
1

Fu, Fangjian, Idiosyncratic and the cross-session of expected stock returns, Journal of Financial
Economics, 2009, p. 27.
2
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

10

Empirical Finance

Group Assignment 1

in a time series on each stocks daily (log) excess returns. Subsequently, the monthly
firm specific volatility can be calculated as the standard deviation from the residuals
obtained in the regression.
Ri rt = it + it (Rm - r) + sit SMB + hit HML + i.

(9)

Table 5. Time Series Properties of Idiosyncratic Volatility

This table shows the mean time series properties of each individual stock, for both regular idiosyncratic
volatilities and log-volatilities. IVOL was calculated by dividing the sum of daily prediction errors per
month with the number of observations -4, multiplied by the square-root of the number of observations.
Standard Deviation, Coefficient of Variation and Skewness were calculated for each time series, and then
averaged over the sample.
N
Mean
S.D.
C.V.
Skew
IVOL

IVOL

140

9,43

5,42

0,57

1,97

140

-0,006

0,52

83,98

0,06

Autocorrelation at Lags
4
5
6

0,44

0,39

0,42

0,33

0,32

-0,46

-0,06

0,11

-0,07

-0,03

11

12

13

0,32

0,18

0,24

0,15

0,07

-0,08

0,14

-0,08

Finally, to test the random walk hypothesis, we performed the Dickey Fuller test on
each time series of idiosyncratic volatilities (Fuller, 1996). To confirm the random walk
hypothesis, 0 is expected to be not statistically different from zero. The Dickey Fuller,
or unit root test, is based on the squared monthly idiosyncratic volatilities and estimates
parameters 1 (the slope) and 0 (the intercept).
IVOLi,t+1 - IVOLi,t = 0i + 1iIVOLi,t+i

(10)

Table 6. Testing the random walk process for monthly idiosyncratic volatilities.
This table shows the results of a Dickey-Fuller test without trend and with coefficient. The t-statistics
build on a regression over each stocks time series, regressing the changes in volatility on the volatility of
the past month. The slope estimate 1, its t-statistic, mean, median, 1st and 3rd quartile are cross-series of
the time series results for each individual stock. RW rejected refers to the percentage of stocks being
rejected at a 1% significance level. The rejection is based on Dickey-Fullers critical values for a sample
size of 50, 100 or 250, depending on the monthly volatilities obtained in each time series.
Variables
N
Mean
Median
Q1
Q3
RW rejected (%)
Model:

IVOLi,t+1 - IVOLi,t = 0i + 1iIVOLi,t+i , i = 1,2,...,N, t = 1,2,...,Ti

140

-0,56

-0,55

-0,68

-0,42

t(1)

140

-8,07

-8,17

-9,34

-6,66

Model:

99,29

LnIVOLi,t+1 - LnIVOLi,t = 0i + 1iLnIVOLi,t+i , i = 1,2,...,N, t = 1,2,...,Ti

140

-0,54

-0,53

-0,64

-0,41

t(1)

140

-7,75

-7,81

-8,99

-6,55

97,14

11

Empirical Finance

Group Assignment 1

B. Results
Building the t-statistic from the regression estimates and standard errors allows to us to
reject the hypothesis of whether idiosyncratic equity volatilities follow a random walk,
in 99% of the cases for a significance level of 1%.3 Comparing the results to Fus,
particularly the higher rate of rejection is obvious. While we used a time span of 15
years, he analyzed 43 years, so almost thrice the observations. When retesting testing
the hypothesis, using another random sample of 140 (NASDAQ) stocks barely changed
the results, while adjusting the time series had an immediate effect. By testing the same
data for 10 instead of 15 years, only 93.53% were rejected. This is by no means a
sufficient test, but does open the question how much impact stock and time series
selection might have on the acceptance of the random walk process, and thus, whether
we are able to use this months idiosyncratic volatility to approximate the value in the
next month, or not.4

5. The Timing of Earnings Announcement as a Predictor

Griffin, Hirschey and Kelly study the influence that financial media has in global
markets. Several detailed tests show a significantly greater news impact in the majority
of developed rather than those of emerging markets. The authors present and test four
hypotheses that may be responsible for the differences in price reaction to public news
announcements across countries. Such hypotheses are: pre-announcement public news
dissemination, insider trading, the quality of the transmission mechanism and
accounting quality. While the market reactions can be explained by several variables,
the prevalence of insider trading, either by itself or in combination with other
economical factors, is the most significant explanation. It is slightly followed behind by
the quality of the news transmitted.
This papers results are rather uniform and show a higher reaction in developed markets
for both the frequency and quality of news coverage, stock price reversals on non-news
days, and significantly higher abnormal volatility in earnings announcement event
periods compared to the majority of emerging markets. Generally, strong regulation
regarding insider trading, combined with the reliability of accounting and the frequency
3

The mean t-statistic over the sample is -8,07 with critical values for the 1% significance level ranging
from -3,75 to -3,43, depending on sample size.
4
Fu, Fangjian, Idiosyncratic and the cross-session of expected stock returns, Journal of Financial
Economics, 2009, p. 27.

12

Empirical Finance

Group Assignment 1

and quality of journalism leads to stronger responses to news, which is the case for most
developed countries. If, for example, the regulation of insider trading is more relaxed,
some of the response to an earnings report will already be priced prior to the news
reaching the public thus decreasing the post-announcement market reaction.
One hypothesis explored by the authors is that countries with firms reporting late in the
earnings reporting cycle will have lower stock price responses to news. Conversely,
they conclude it has no significance for cross-industries differences. However, two
papers mentioned by the authors state an empirical relation between the earnings
announcement order and returns within the same industry. Hou K. (2007) concludes
that the lead-lag effect5 contains a persistent, highly significant and within industries
component, so that big firms returns lead small firms ones. Patton, A. and Verardo, M.
(2010) infer that betas increase on announcement days by a statistically and
economically significant amount, and that these beta changes are greater for
announcements that occur earlier in the earnings season. Furthermore, Barth, Mary E.
(2014) shows that earnings announcements are a source of non-diversifiable risk, using
options prices implied volatility as a proxy for volatility risk premium. The reason is
that investors buy options on these specific dates either to hedge their exposure or to
speculate. By doing so they pay a premium that increases the likelihood of being ITM at
expiration. Thus, the writer expects a compensation for bearing that risk.
Therefore, our idea is to further explore the implications of the earnings announcement
order. More specifically, to test whether this cycle, in the extent that companies
reporting later have already some information incorporated on their stock prices and
thus react less, can be used to determine: 1) if an hedge using options is too expensive;
2) if those late announcement companies can be excluded of being used for options
volatility-based strategies, due to the predictability (or not) of a small reaction.
Moreover, a new approach can be adopted from this paper. Although the majority uses
the earnings announcement dates taken from I/B/E/S data, this article finds its only
accurate on average 23% for developed markets and 8.4% for emerging markets. The
authors use a matching procedure between Bloomberg earnings announcement dates
and Factiva earnings news that have proved to be much more accurate. Such method
could be used in further investigation.
5

A lead-lag effect describes the situation where one leading variable is cross-correlated with the values of
another lagging variable at later times

13

Empirical Finance

Group Assignment 1

6. Conclusion
Our paperwork analyses empirical facts and previous studies on properties of stock
returns. Using them as background we performed tests to verify the strength of their
results, and also looked for further applications of those statistical findings. Regarding
the study of stylized facts, we found that in general terms autocorrelation, leverage
effect, and Agregational Gaussianity hold. However, for some time-lags and periods our
results differ from those described in literature. Such difference may be due to the stock
sample used and also to the time periods chosen. When performing the prediction of
equity premiums, despite our effort to perform a regression using a economically
significant variable and representative sample, we were unable to find a robust predictor
as it was expectable. As for the analysis of idiosyncratic stock volatilities random walk,
our test rejects the hypothesis that idiosyncratic stock volatilities follow a random walk.
It contradicts Louis Bacheliers hypothesis and confirms Fus findings. Lastly, we
considered Griffin, Hirschey and Kelly study on the influence of financial media in
global markets. Departing from this paper we presented ideas to use the knowledge on
the paper to further assess a new relationship between variables, namely whether a
hedge using options is too costly, and also if companies that announce earnings late can
be excluded from option volatility-based strategies.
This paperwork works as a practical application of already proven empirical knowledge
by replicating scientific models with recent data.

7. References
FRENCH, K. (2015), Fama/French 3 Factors [Daily], accessible at:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
FU, F. (2009), Idiosyncratic and the cross-section of expected stock returns, in: Journal of Financial
Economics 91, 1, p.24-37.
CONT, R. (2001), Empirical Properties of asset returns: stylized facts and statistical issues, in:
Quantitative Finance Volume 1, p. 223-236.
GOYAL, A./WELCH, I. (2008), A Comprehensive Look at the Empirical Performance of Equity
Premium Prediction, in: Oxford University Press, accessed February 14th, 2016, accessible at:
http://www.hec.unil.ch/agoyal/docs/Predictability_RFS.pdf
GRIFFIN, J./HIRSCHEY, N./ KELLY, P. (2011), How important Is the Financial Media in Global
Markets?, in: The Review of Financial Studies 24(12), p. 3941-3992.
BOX, G./ JENKINS, G. (1970), Time Series Analysis: Forecasting and Control.
JANDA, K., Significance of the Correlation Coefficient, accessible at:
http://janda.org/c10/Lectures/topic06/L24-significanceR.htm

14