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Models Of Stock Market Predictability

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  • Burton G. Malkiel
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    Abstract

    I briefly review the success of past studies purporting to explain equity valuations and predict future equity returns. The Campbell-Shiller mean reversion models are contrasted with an expanded version of the so-called Federal Reserve model. At least from 1970 to 2003, Federal Reserve-type models did somewhat better at predicting long-horizon returns than did a mean reversion model based on dividend yields and price-earnings multiples. However, timing investment strategies based on any of these prediction models do no better than a buy-and-hold strategy. Although some predictability of returns exists, there is no evidence of any systematic inefficiency that would enable investors to earn excess returns. 2004 The Southern Finance Association and the Southwestern Finance Association.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 27 (2004)
    Issue (Month): 4 ()
    Pages: 449-459

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    Handle: RePEc:bla:jfnres:v:27:y:2004:i:4:p:449-459

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    Cited by:
    1. Cajueiro, Daniel O. & Tabak, Benjamin M., 2006. "Testing for predictability in equity returns for European transition markets," Economic Systems, Elsevier, vol. 30(1), pages 56-78, March.
    2. Chih-Ling Tsai & Hansheng Wang & Ning Zhu, 2010. "Does a Bayesian approach generate robust forecasts? Evidence from applications in portfolio investment decisions," Annals of the Institute of Statistical Mathematics, Springer, vol. 62(1), pages 109-116, February.
    3. Ricardo M. Sousa, 2010. "Time-Varying Expected Returns: Evidence from the U.S. and the U.K," NIPE Working Papers 10/2010, NIPE - Universidade do Minho.
    4. McPherson, Matthew Q. & Palardy, Joseph, 2007. "Are international stock returns predictable?: An examination of linear and non-linear predictability using generalized spectral tests," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 17(5), pages 452-464, December.

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