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Predicting Daily Stock Returns: A Lengthy Study of the Hong Kong and Tokyo Stock Exchanges

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  • Jeffrey E. Jarrett

    (University of Rhode Island, Faculty of Management Science and Finance, U.S.A.)

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    Abstract

    If stock markets are efficient then it should not be possible to predict stock returns, i.e., no explanatory variable in a stock market regression model should be statistically significant. In this study, we find results indicating that daily effects exist in stock market returns. These daily or calendar effects previously shown to exist by others clearly indicate the purpose of this study. Researchers often equate stock market efficiency with the non-predictability property of time series of stock returns. We explore whether this line of argument is satisfactory and aids in furthering our understanding of how markets operate. We focus on one definition of capital market efficiency and on the experience of these principles in analyzing the performance of Hong Kong and Tokyo stock exchanges. We observe that stock returns (which include closing prices and dividends) are predictable and there are explanations for short-term predictability. Hong Kong and Japan are the focus of this study because of the maturity of their financial markets and the availability of clean data on these markets from a reputable and available source.

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    Bibliographic Info

    Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

    Volume (Year): 7 (2008)
    Issue (Month): 1 (April)
    Pages: 37-51

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    Handle: RePEc:ijb:journl:v:7:y:2008:i:1:p:37-51

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    Postal: 100 Wenhwa Road, Seatwen, Taichung
    Web page: http://www.ijbe.org/
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    Related research

    Keywords: market efficiency; prediction; stock returns; daily effects; time series;

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    References

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    1. John Y. Campbell, 1988. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
    2. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    3. Yoon-Jae Whang & Young-Hyun Cho & Oliver Linton, 2006. "Are there Monday effects in Stock Returns: A Stochastic Dominance Approach," FMG Discussion Papers dp568, Financial Markets Group.
    4. Pesaran, M Hashem & Timmermann, Allan, 2000. "A Recursive Modelling Approach to Predicting UK Stock Returns," Economic Journal, Royal Economic Society, vol. 110(460), pages 159-91, January.
    5. Andrew W. Lo & A. Craig MacKinlay, 1989. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
    6. Shigeyuki Hamori & Akira Tokihisa, 2002. "Some International Evidence on the Seasonality of Stock Prices," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 1(1), pages 79-86, April.
    7. Granger, Clive W. J., 1992. "Forecasting stock market prices: Lessons for forecasters," International Journal of Forecasting, Elsevier, vol. 8(1), pages 3-13, June.
    8. J. Andrew Coutts & Peter Hayes, 1999. "The weekend effect, the Stock Exchange Account and the Financial Times Industrial Ordinary Shares Index: 1987-1994," Applied Financial Economics, Taylor & Francis Journals, vol. 9(1), pages 67-71.
    9. Giuseppe Alesii, 2006. "Fundamentals Efficiency of the Italian Stock Market: Some Long Run Evidence," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(3), pages 245-264, December.
    10. Kim-Leng Goh & Kim-Lian Kok, 2006. "Beating the Random Walk: Intraday Seasonality and Volatility in a Developing Stock Market," International Journal of Business and Economics, College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan, vol. 5(1), pages 41-59, April.
    11. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    12. Steeley, James M., 2001. "A note on information seasonality and the disappearance of the weekend effect in the UK stock market," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1941-1956, October.
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