AbstractThis paper proposes a new predictor by calculating the difference between the Japanese candlestick’s upper and lower shadows (ULD) constructed from CBOE volatility index (VIX) data. ULD is a powerful predictor for future stock returns, and higher ULD leads to the subsequent decline of stock returns. Our results show that our new predictor generates R^2 values of up to 2.531% and 3.988% in-sample and out-of-sample, respectively; these values are much larger than the previous fundamental predictors. Moreover, the predictive information c...
