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Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data

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Author Info

  • Kim, Jae H.
  • Shamsuddin, Abul
  • Lim, Kian-Ping

Abstract

This paper provides strong evidence of time-varying return predictability of the Dow Jones Industrial Average index from 1900 to 2009. Return predictability is found to be driven by changing market conditions, consistent with the implication of the adaptive markets hypothesis. During market crashes, no statistically significant return predictability is observed, but return predictability is associated with a high degree of uncertainty. In times of economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty in predictability. We find that return predictability has been smaller during economic bubbles than in normal times. We also find evidence that return predictability is associated with stock market volatility and economic fundamentals.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 18 (2011)
Issue (Month): 5 ()
Pages: 868-879

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Handle: RePEc:eee:empfin:v:18:y:2011:i:5:p:868-879

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Economic bubbles; Economic crises; Adaptive markets hypothesis; Market efficiency; U.S. stock market;

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Cited by:
  1. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2012. "Exchange-rate return predictability and the adaptive markets hypothesis: Evidence from major foreign exchange rates," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1607-1626.
  2. Amélie Charles & Olivier Darné & Jae H. Kim, 2014. "Precious metals shine? A market efficiency perspective," Working Papers hal-01010516, HAL.
  3. Chen, Haojun & Maher, Daniela, 2013. "On the predictive role of large futures trades for S&P500 index returns: An analysis of COT data as an informative trading signal," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 27(C), pages 177-201.
  4. Urquhart, Andrew & Hudson, Robert, 2013. "Efficient or adaptive markets? Evidence from major stock markets using very long run historic data," International Review of Financial Analysis, Elsevier, vol. 28(C), pages 130-142.
  5. Rico Belda, Paz, 2013. "No linealidad y asimetría en el proceso generador del Índice Ibex35/Nonlinearity and Asymmetry in the Generator Process of Ibex35 Index," Estudios de Economía Aplicada, Estudios de Economía Aplicada, vol. 31, pages 555-576, Septiembr.
  6. Todea, Alexandru & Pleşoianu, Anita, 2013. "The influence of foreign portfolio investment on informational efficiency: Empirical evidence from Central and Eastern European stock markets," Economic Modelling, Elsevier, vol. 33(C), pages 34-41.
  7. Bariviera, A.F. & Guercio, M. Belén & Martinez, Lisana B., 2012. "A comparative analysis of the informational efficiency of the fixed income market in seven European countries," Economics Letters, Elsevier, vol. 116(3), pages 426-428.
  8. Kinnunen, Jyri, 2013. "Dynamic return predictability in the Russian stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 107-121.
  9. Taylor, Nick, 2014. "The rise and fall of technical trading rule success," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 286-302.

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