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Semi-parametric Estimation and the Predictability of Stock Market Returns: Some Lessons from Japan

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  • Enrique Sentana
  • Sushil Wadhwani

Abstract

The paper attempts to explore whether lagged variables that help predict stock returns are merely proxying for mis-measured risk. Therefore, three different ways of measuring risk are employed (i.e. semi-parametric, GARCH and lagged squared returns). In an application to Japanese data, four key predictor variables are shown to have non-trivial additional forecasting power irrespective of how we measure risk. Interestingly, unlike the U.S., the level of the lagged dividend yield is not positively correlated with returns in either Japan or South Korea.

Suggested Citation

  • Enrique Sentana & Sushil Wadhwani, 1991. "Semi-parametric Estimation and the Predictability of Stock Market Returns: Some Lessons from Japan," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 547-563.
    • Handle: RePEc:oup:restud:v:58:y:1991:i:3:p:547-563.
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    File URL: http://hdl.handle.net/10.2307/2298011
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    Citations

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    Cited by:

    1. Longin, Francois & Solnik, Bruno, 1995. "Is the correlation in international equity returns constant: 1960-1990?," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 3-26, February.
    2. Benoit Perron, 2003. "Semiparametric Weak-Instrument Regressions with an Application to the Risk-Return Tradeoff," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 424-443, May.
    3. Nijman, T.E. & Palm, F.C., 1991. "Recent Developments in Modeling Volatility in Financial Data," Papers 9168, Tilburg - Center for Economic Research.
    4. Peter F. Christoffersen & Francis X. Diebold, 2006. "Financial Asset Returns, Direction-of-Change Forecasting, and Volatility Dynamics," Management Science, INFORMS, vol. 52(8), pages 1273-1287, August.
    5. Antonis Demos & George Vasillelis, 2007. "U.K. Stock Market Inefficiencies and the Risk Premium," Multinational Finance Journal, Multinational Finance Journal, vol. 11(1-2), pages 97-122, March-Jun.
    6. Peter Christoffersen & Francis X. Diebold, 2002. "Financial Asset Returns, Market Timing, and Volatility Dynamics," CIRANO Working Papers 2002s-02, CIRANO.
    7. Hallam, Arne, 1992. "A Brief Overview Of Nonparametric Methods In Economics," Northeastern Journal of Agricultural and Resource Economics, Northeastern Agricultural and Resource Economics Association, vol. 21(2), pages 1-15, October.
    8. Jonathan Manton & Anton Muscatelli & Vikram Krishnamurthy & Stan Hurn, "undated". "Modelling Stock Market Excess Returns by Markov Modulated Gaussian Noise," Working Papers 9806, Business School - Economics, University of Glasgow.

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