Want to make a killing in the stock market? Finding out who is running up their electric bill may help.
That’s the surprising finding of research by Eli Broad College of Business associate professor Hayong Yun, whose work was recently honored with the William F. Sharpe Award from the Journal of Financial and Quantitative Analysis, one of the nation’s leading finance journals.
The study, titled “Industrial Electricity Usage and Stock Returns,” found “that you can look at the change in last year’s electricity usage by industrial firms, and it will predict the direction of this year’s stock price changes,” said Yun, of the Department of Finance.
“Why does industrial electricity growth predict future stock returns? Because firms expecting an increase in sales will crank up their machines to produce more goods, which will involve increased electricity consumption,” Yun said.
The study was co-authored by Yun, Zhi Da of the University of Notre Dame, and Dayong Huang of the University of North Carolina at Greensboro, who are also sharing the prize with Yun.
The idea came from Yun’s past job as a senior researcher for Samsung Electronics. “I was familiar with electricity consumption data, and always thought it would be a useful indicator for economic activities, Yun said. “The project shows that it is indeed the case.”
The benefits to this research are obvious: it allows investors to create a strategy to exploit this predictability, Yun said.
This year’s Sharpe Award for Scholarship in Financial Research recognizes researchers who, through their articles published in the JFQA in 2017, have most contributed to the understanding of important areas of financial economics, according to JFQA’s Web site.
Nominees are chosen by a vote of JFQA readers and associate editors, with the final selection made by the journal’s managing editors. The award comes with a $5,000 cash prize, the JFQA said.
“MSU faculty receiving this award means that MSU is one of the top research institutions in the world for finance research,” Yun said.
It’s not Yun’s first big win for his research. In 2013 he was honored with the Brattle Prize for providing empirical evidence on how corporate risk management actually benefits firms, “which researchers wanted to prove for the past 30 years,” Yun said.
The Brattle Group Prizes in Corporate Finance are awarded annually for outstanding academic papers in the corporate finance field, as chosen by the associate editors of the Journal of Finance, according to the Brattle Prize home page.
Yun’s latest honor excited Broad College Dean Sanjay Gupta. “This is a wonderful recognition of your scholarship and contributions to the literature. Together with your Brattle Prize, you have made the Broad finance faculty stand out amongst our peers,” Gupta wrote to Yun.
What’s next for Yun? He is now examining progress in using artificial intelligence in finance and the effects of municipal bankruptcy laws on local economies, among other topics, he said.
“Maintaining a research environment that allows researchers to pursue such ambitious topics is important and can yield path-breaking research … I am grateful for the Broad College’s unconditional financial support for some of my ambitious projects, which may take time to materialize, and would be otherwise unable to pursue if I were to depend on short-term, success-based funding,” Yun said.