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 Back and Kevin Crotty.

Investors might be drawn to active fund investing, but index funds might be less risky, according to Rice University researchers. Getty Images

Rice University research finds how index funds can be a good investment opportunity for the risk adverse

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It's easy to assume that investing, like cooking, requires skill to get the right mix of ingredients. But that's not the case with index funds. Effort goes into building them, but these ready-made investments need minimal intervention. Yet the outcomes are appetizing indeed.

In the past few decades, use of index funds has exploded. So have media coverage and advertisements questioning if they can truly compete with active funds. A recent study by Alan Crane and Kevin Crotty, professors at the business school, provides a resounding "yes." These humble investment recipes, it turns out, are richer than they might seem.

Index funds track benchmark stock indexes, from the familiar Dow Jones Industrial Average to the widely followed Standard & Poor's 500. Like viewers following a cooking show, index fund managers buy stocks in the same companies and same proportions as those listed in a stock index. The best-known indices are traditionally based on the size of the companies.

The idea is that the index fund's returns will match those of its model. An S&P 500 index fund, for example, includes stocks in the same 500 major companies included in the Standard & Poor index, ranging from Apple to Whole Foods.

Index funds are part of the broad range of investment products called mutual funds. Like cooks making a stew, mutual fund managers add shares of various stocks into one single concoction, inviting investors to buy portions of the whole mixture.

While some mutual funds are active, meaning professional managers regularly buy and sell their assets, index funds are passive. Their managers theoretically just need to keep an eye on any changes in the index they're copying. Not surprisingly, active index funds tend to charge more than passive ones.

Curiously, not all index funds perform at the same level. So what should that mean for investors? To study these variations and their implications, Crane and Crotty expanded on past research about skill and index fund management, analyzing the full cross section of funds.

This wasn't possible to do until fairly recently: there simply weren't enough index funds to study. The first index fund, which tracked the S&P 500, was developed by Vanguard in the 1970s. To do their research, the Rice Business scholars looked at performance information for both index and active funds, starting their sample in 1995 with 29 index funds. The sample expanded to include a total of 240 index funds, all at least two years old with at least $5 million in assets, mostly invested in common stocks. They also analyzed 1,913 actively managed funds.

Using several statistical models, Crane and Cotty found that outperformance in index-fund returns was greater than it would be by chance. The discovery suggests that passive funds, although they require little skill to run, have almost as much upside as active funds.

In fact, the professors found, the best index funds perform surprisingly closely to the best active funds, but at a lower cost to the investor. The worst active funds perform far worse than the worst index funds–even before management fees.

The findings topple the conventional wisdom that only actively managed funds stand a chance of beating the market. While active-fund managers often measure their success against that of passive funds, the data show investors who are risk averse would do better to choose passive funds over more expensive active ones.

More adventurous investors, of course, will always be tempted by what's cooking in actively managed funds. But overall, investing in plain index funds is as good a meal at a lower price.

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This story originally ran on Rice Business Wisdom.

Alan D. Crane and Kevin Crotty are associate professors of finance at the Jones Graduate School of Business at Rice University.

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New Houston-born app OpenToBites connects users over meals in 16 cities

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A Houston-born social is connecting foodies and social butterflies for shared meals. OpenToBites launched on Android on June 18 and iOS on June 22, and is available to use for free in Houston and beyond.

Founded and operated by Houston developer Kelvin John, OpenToBites allows users to connect over meals in 16 cosmopolitan cities. That includes Austin and Houston in Texas, plus other American cities like Denver and New York, and even international destinations including Paris, Tokyo, and Sydney.

The app is built on a simple concept, and a press release emphasizes that it's for anyone who wants "friendly company."

“We built OpenToBites in response to several trends, including the rise of solo travel and the demand for social experiences that don’t feel like dating, networking, or large organized events,” said a spokesperson in the release. “We are not a dating app. We are offering shared food and conversation for people who want simple, in-person meal company in a public setting.”

When signing up, users provide their first name, an optional profile photo, and a short bio. They mark themselves as a traveler, a local, or both, and have the option to select their age range or opt out.

Once a profile is created, the user can search for existing meals or create a meal happening within the next 72 hours. To find an existing meal to join as a guest, they select the city, date, and apply filters for the number of seats, type of cuisine, and whether they want to share food with the table or order their own.

Since someone has to get the party started, users can also take the initiative to start a meal as a host. They'll choose the date, time, and restaurant — anything is on the menu, as long as they can link to the restaurant on Google Maps or its own website.

This divides users into "host" and "guest." Guests request to join a table, and a host can decide to accept the request or not. Guests aren't able to see the exact restaurant until their request is accepted, so hosts have a "helpful note" field to fill out with more information about the restaurant.

A similar app called Timeleft launched in Austin in 2024, acting as a friendship matchmaker for small groups of strangers who answer personality questions, meet at a restaurant for dinner, and decide if they wanted to stay in touch.

Though OpenToBites has a similar concept, it seems to work more like Couchsurfing, an app that connects travelers on their own terms. OpenToBites also emphasizes the immediate over the long-term — the meal itself is the social goal.

OpenToBites is available for free on the App Store and Play Store; the app plans to grow each current city's user base before adding new locations.

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This article originally appeared on CultureMap.com.

Houston mental health nonprofit expands platform statewide to connect more Texans with care

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As mental health conversations evolve, the necessary pivot becomes how organizations across Texas navigate improved ways to help people access the care they need before their challenges become crises.

That’s why Mental Health America of Greater Houston recently announced that it is expanding its Care Connect platform statewide.

The expansion will address perhaps the most persistent barrier to behavioral healthcare—helping people find and navigate services that already exist.

Care Connect’s extended reach comes at a time when more than 3.5 million adults in the state live with some kind of mental health condition and scores of those in need continue to struggle with accessing care despite the growing awareness of mental health needs.

According to President and CEO Renae Vania Tomczak, Care Connect’s main goal was to remove as many obstacles as possible that Texans face when seeking mental health support.

“Care Connect was about a two-year planning process,” Tomczak says. “It really began with asking what challenges people in the Greater Houston Area were facing regarding mental health. It’s not just accessing care, but the difficulty in navigating the mental healthcare system.”

While provider shortages remain a challenge in some communities, Mental Health America of Greater Houston found that many individuals and families struggle simply to determine where to turn, how to identify the right provider and whether services are affordable.

“We wanted to make it easier for people who have questions, who may never have had a mental health challenge before, or they’re a caregiver for somebody who has a mental health issue,” Tomczak says. “We wanted to be the place that people can come to get their questions answered and be connected to care.”

Care Connect combines a vetted network of more than 1,000 providers and services across Texas with personalized navigation support.

Searches generate care results based on insurance coverage, language preferences, ZIP code and clinical specialties.

Additionally, one-on-one guidance and follow-up support are provided by bilingual resource specialists.

The platform also seeks to address affordability, one of the most significant barriers to mental healthcare access. Through participating providers, eligible individuals can receive six to eight counseling sessions at no cost.

“We have several providers who are willing to provide six to eight counseling sessions at no cost for people who do not have the means to pay for services themselves,” Tomczak says.

When provider matches are unavailable, the organization can connect individuals with master’s-level mental health professionals working under the supervision of licensed clinicians.

The statewide rollout builds on the platform’s early success in the Houston region, where it has helped thousands of individuals connect with mental health resources since launching last fall.

According to Tomczak, the decision to expand was driven in part by growing demand from outside the organization’s traditional service area.

“Last month we decided to take this program statewide,” she says. “It’s not just Houston that can use help in connecting to appropriate mental health services, but the whole state.”

The Care Connect program’s promotion through healthcare providers, community organizations and public-sector partners across Texas is now one of Mental Health America of Greater Houston’s top priorities.

Their goal is to create a stronger referral ecosystem that ultimately helps those who need access to mental health care more quickly.

To facilitate that, the organization has also added free mental health screenings to its website so that users will better identify any symptoms related to anxiety, depression and other conditions.

“Once they do that, then where do they go?” Tomczak says. “They’re not sure who to call and who can help them. At that point, we hope they’ll call us and talk to somebody live who can answer their questions and help them get started on the right path to improving their mental health.”

With eyes on the future, Tomczak believes public understanding of mental health has improved in recent years, particularly following the COVID-19 pandemic, which brought new attention to the effects of stress, isolation and uncertainty.

“The more we talk about it and have the opportunity to share that mental health conditions are traceable, the better,” she says.

According to Tomczak, long-term, Care Connect aims to reduce roadblocks that exist between recognizing the need for help and receiving it.

Ultimately, Care Connect hopes to create a robustly connected behavioral health system that gives Texans the ability to access mental health services swiftly and with confidence.

“No one should have to navigate mental health challenges alone,” Tomczak adds. “Care Connect is here to help connect people with resources, services and answers to ensure they get the care they need to take the next step toward better mental health.”

ExxonMobil sets date to make Texas its legal HQ

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Energy giant Exxon Mobil Corp. has set a date to move its legal headquarters to Texas.

The Spring-based company announced this week that the redomiciliation from New Jersey to Texas is expected to be effective July 1. Exxon's board of directors unanimously recommended redomiciling in the Lone Star State in March, and shareholders approved the move to Texas at the company’s annual meeting in May.

As part of the move, ExxonMobil Holdings Corp. will replace Exxon Mobil Corp. of New Jersey and become the publicly traded parent company. Exxon reports that its shares will continue to trade on the New York Stock Exchange under the ticker symbol “XOM,” and that shareholders do not need to take action.

At the time of the recommendation, Exxon said the move would not affect business operations, management, strategy, assets or employee locations.

Exxon Chairman and CEO Darren Woods added that the redomiciliation was in part due to Texas' business-friendly environment and policies.

"Over the past several years, Texas has made a noticeable effort to embrace the business community. In doing so, it has created a policy and regulatory environment that can allow the company to maximize shareholder value,” Woods said in a news release. "Aligning our legal home with our operating home, in a state that understands our business and has a stake in the company’s success, is important.”

The Associated Press reports that about 30 percent of Exxon's employees work in Texas. Exxon's legal headquarters has been based in New Jersey since 1882, when it was Standard Oil Company.

Exxon moved its operational headquarters from Irving, Texas, to the Houston area in 2023.

Exxon was the highest-ranking Houston-area company on this year's Fortune 500 list, coming in at No. 9. Houston tied with Chicago for the second-most Fortune 500 headquarters on this year's list, with Texas leading the nation for the most Fortune 500 headquarters (57).

“Texas is the undisputed headquarters of headquarters,” Gov. Greg Abbott said in a news release. “The world’s leading businesses invest with confidence in Texas because of our welcoming business climate, predictable regulatory environment, and skilled and growing workforce. People and businesses are choosing Texas because Texas works.”

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This article originally appeared on our sister site, EnergyCapitalHTX.com.

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