Houston research: Can predictive tools help forecast the stock market?

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The stock market has always been hard, if not impossible, to forecast. Image via Getty Images

What do you think the Standard & Poor’s 500 index will do over the next year?

When Rice Business finance professor Kevin Crotty asks his MBA students this question, the answers are all over the map. Some students expect the overall return on the stock market to be 10 percent, while others predict a loss of 20 percent.

This guessing game is closer to real life than many people realize. Experienced investors, people who have watched the stock market ebb and flow for many years, know that making predictions is a risky business. “Many money managers are more confident choosing individual stocks than trying to time the market,” says finance professor Kevin Crotty.

For most of the past century, academics have applied their power of analysis to understanding and predicting the stock market. Recently, some finance researchers have taken a closer look at option prices—the price paid for the right to buy or sell a security (like a stock or bond) at a specified price in the future. Combining economic theory with high-frequency options price data, they argued that they could estimate the expected return on the market in real-time, which would represent a tremendous development for finance practitioners and academics alike.

Crotty teamed up with Kerry Back, a fellow Rice Business professor, and Seyed Mohammad Kazempour, a finance Ph.D. student at the Jones Graduate School of Business, to evaluate whether the new predictors based on option prices really are a valuable forecasting tool. “Options are essentially a forward-looking contract, so it’s possible that they could be used to create a forward-looking measure of expected returns,” says Kazempour.

Economic theory suggests that the new predictors might systematically underestimate expected returns. The team set out to test if this may be the case, and if so, whether the predictors are useful as a forecasting tool. In their paper, “Validity, Tightness, and Forecasting Power of Risk Premium Bounds,” the Rice Business researchers ran the predictors through a more rigorous set of statistical tests that provide more power to detect whether the predictors systematically underestimate expected returns. The statistical tests used in previous research on the topic were less stringent, leading to conclusions that the predictors do not underestimate expected returns.

In short, the new predictors didn’t pass the more stringent tests. The researchers found that forecasts built on stock options consistently underestimated market returns. Moreover, the predictors are enough of an underestimate that they are not very useful as forecasts of market returns.

The results were somewhat anticlimatic, the researchers admit. If the option-based predictors had panned out, it could have become an innovative new tool for thinking about market timing for asset managers as well as investment decision-making for corporate finance projects. “Trying to estimate expected market returns is closely related to whether corporations decide to invest in projects,” notes Crotty. “The expected market return is an input in estimating the cost of capital when evaluating projects, and I explain in my MBA courses that we don’t have very precise estimates for this input. During this research project, I kept thinking about how cool it would be if we really had a better estimate,” he says.

Their research doesn’t end here. Crotty and Back have already begun brainstorming ways to potentially improve the option-based forecasting tool so that it can become more accurate.

At best, though, using option prices as a forecasting tool will only be one ingredient out of many that investors use to make decisions. “This tool may inform money management, but it will never drive it,” says Back.

For now, at least, the Rice researchers believe that trying to predict the stock market is still a very risky game.

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This article originally ran on Rice Business Wisdom and was based on research from Rice Professors Kerry Backand Kevin Crotty.

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Innovative Houston nonprofit partners with county organization to provide maternal health services

TEAM WORK

PUSH Birth Partners, a Houston-based maternal health nonprofit, is teaming up with the Harris County Public Health Department to provide doula services for over 200 pregnant people free of cost.

Jacqueline McLeeland, CEO and founder of PUSH, says the program will begin in August and aims to improve maternal health and birth outcomes for vulnerable populations. McLeeland says the organization has built up a strong doula training program through their collective in partnership with March of Dimes and several local doula organizations.

McLeeland says PUSH aims to address poor maternal health outcomes for women of color in part by training more doulas of color who can help reduce racial disparities in care. A 2021 study by Harris County Public Health found Precinct 1, which is predominantly composed of people of color, had the highest maternal mortality rate of the county.

Through their collective, PUSH has trained two cohorts of doulas through an integrated care model, focused on providing collaborative care with medical providers in the healthcare system.

“Our programs are designed to advance health equity, we see the numbers, we see that women of color, specifically Black women in that group are disproportionately impacted,” McLeeland tells InnovationMap.

After receiving a $100,000 grant from the Episcopal Health Foundation in 2023, PUSH began their doula expansion program in Houston and they have since received an additional grant from EHF for the next fiscal year. McLeeland shares PUSH has also launched a pilot program called Blossoming Beyond Birth, sponsored by the Rockwell Fund, targeted towards improving maternal mental health through weekly support groups in Houston.

“It’s very exciting to know that we have come this far from where we started and to see how everything is coming together,” McLeeland shares.

Jacqueline McLeeland serves as chief executive and founder of non-profit PUSH Birth Partners who has trained and collaborated with a network of doulas for the partnership. Photo courtesy of Jacqueline McLeeland

For McLeeland, improving maternal health outcomes and providing support to people experiencing high-risk pregnancies are deeply personal goals. McLeeland has sickle cell anemia, a condition that can cause serious complications during pregnancy. During her first pregnancy in 2015, McLeeland was placed on bed rest two months before her due date at which point she had been working in clinical research within the pharmaceutical industry for over 12 years.

“People don’t realize the magnitude of what women go through, during pregnancy and after,” McLeeland says. “There’s a lot of emotional, psychological, and physical tolls depending on how the pregnancy and delivery went.”

After giving birth to her first child, McLeeland took maternity leave, during which she began to research maternal morbidity and mortality trends, information which she says was not widely discussed at the time.

McLeeland says entering the maternal healthcare field felt like a necessity following her second pregnancy. Several months after giving birth to her second child, McLeeland says she received a bill for a surgical procedure that was performed during her cesarean section without her or her husband’s consent. McLeeland says that was the first time she was made aware of the surgery.

“The procedure that was claimed to have been performed could have put my life in jeopardy by hemorrhaging based off of additional research I did once, I came across that information,” McLeeland explains. “These are some of the things that happen in the healthcare system that make people skeptical of trusting in the healthcare system, trusting in doctors.”

McLeeland says the key to improving maternal and birth outcomes for vulnerable populations is to encourage the partnership between doulas, community healthcare workers, and physicians and hopes to further this collaboration through future programming.

Houston-based clean energy site developer raises $300M to decarbonize big tech projects

fresh funding

Houston energy executives have started a new company dedicated to developing clean-powered infrastructure for the large electric loads.

Cloverleaf Infrastructure, dually headquartered in Houston and Seattle, Washington, announced its launch and $300 million raised from NGP and Sandbrook Capital, two private equity firms. The company's management team also invested in the company.

As emerging technology continues to grow electricity load demand, Cloverleaf has identified an opportunity to develop large-scale digital infrastructure sites powered by low-carbon electricity.

"The rapid growth in demand for electricity to power cloud computing and artificial intelligence poses a major climate risk if fueled by high-emission fossil fuels," David Berry, Cloverleaf's CEO, says in a news release. "However, it's also a major opportunity to catalyze the modernization of the US grid and the transition to a smarter and more sustainable electricity system through a novel approach to development.

"Cloverleaf is committed to making this vision a reality with the support of leading climate investors like Sandbrook and NGP."

Berry, who's based in Houston, previously co-founded and served as CFO at ConnectGen and Clean Line Energy Partners, clean energy and transmission developers. Last year, he co-founded Cloverleaf with Seattle-based Brian Janous and CTO Jonathan Abebe, who most recently held a senior role at the United States Department of Energy. Nur Bernhardt, director of Energy Strategy at Microsoft who's also based in Seattle, rounds out the executive team as vice president.

"The large tech companies have become dominant players in the electricity sector, and they are genuinely determined to power their growth with the lowest possible emissions," Janous, who serves as chief commercial officer, says in the release. "Achieving this objective doesn't depend on disruptive new technologies as much as it does on dedicated teams working hand in hand with utility partners to maximize the use of the clean generation, storage, and other technologies we already have."

Cloverleaf will work with regional U.S. utilities and data center operators to provide clean electricity at scale through strategic investments in transmission, grid interconnection, land, onsite power generation, and electricity storage, per the release.

"The sustainable development of digital infrastructure at scale is fundamentally a technical power problem," Alfredo Marti, partner at Sandbrook, adds. "We have witnessed members of the Cloverleaf team effectively address this challenge for many years through a blend of creativity, specialized engineering, a partnership mindset, and astute capital deployment."

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This article originally ran on EnergyCapital.

Houston resilience tech innovator proves out platform amid Hurricane Beryl

HOUSTON INNOVATORS PODCAST EPISODE 245

Earlier this month, Ali Mostafavi got an unexpected chance to pilot his company's data-backed and artificial intelligence-powered platform — all while weathering one of Houston's most impactful storms.

Mostafavi, a civil and environmental engineering professor at Texas A&M University, founded Resilitix.AI two years ago, and with the help of his lab at A&M, has created a platform that brings publicly available data into AI algorithms to provide its partners near-real time information in storm settings.

As Hurricane Beryl came ashore with Houston on its path, Mostafavi says he had the opportunity to both test his technology and provide valuable information to his community during the storm.

"We were in the process of fine tuning some of our methods and algorithms behind our technology," Mostafavi says on the Houston Innovators Podcast. "When disasters happen, you go to activation mode. We put our technology development and R&D efforts on hold and try to test our technology in an operational setting."

The platform provides its partners — right now, those include local and state organizations and emergency response teams — information on evacuation reports, street flooding, and even damage sustained based on satellite imagery. Mostafavi says that during Beryl, users were wondering how citizens were faring amid rising temperatures and power outages. The Resilitix team quickly pivoted to apply algorithms to hospital data to see which neighborhoods were experiencing high volumes of patients.

"We had the ability to innovate on the spot," Mostafavi says, adding that his own lack of power and internet was an additional challenge for the company. "When an event happens, we start receiving requests and questions. ... We had to be agile and adapt our methods to be responsive. Then at the same time, because we haven't tested it, we have to verify that we are confident (in the information we provide)."

On the episode, Mostafavi shares how Hurricane Harvey — which occurred shortly after Mostafavi moved to Houston — inspired the foundation of Resilitix and how Houston is the ideal spot to grow the company.

"We are very excited that our company is Houston based," he says. "We should not be just ground zero of disasters. We have to also be ground zero for solutions as well. I believe Houston should be the hub for resilience tech innovation as it is for energy transition.

"I think energy transition, climatetech, energy tech, and disaster tech go hand in hand," Mostafavi continues. "I feel that we are in the right place."

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