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Predictability in Stock Returns in an Emerging Market: Evidence from KSE 100 Stock Price Index

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Author Info
Khurshid M. Kiani (University of the West Indies, Mona Campus, Kingston, Jamaica, West Indies.)
Abstract

We investigate the persistence in monthly KSE100 excess stock returns over the Treasury bills rates using non-Gaussian state space or unobservable component model with stable distributions and volatility persistence. Results from our non-Gaussian state space model, which is an improvement over Conard and Kaul (1988), show that the conditional distribution has a stable of 1.748 and normality is rejected even after accounting for GARCH. There exists a statistically significant predictable component in the KSE 100 excess stock returns. The optimal predictor in the unconditional expectation of the series is estimated to be 0.18 percent per annum. An evidence of highly nonconstant scales in different periods of time exhibits a tendency towards stock market crashes which invites remedial policy action.

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Publisher Info
Article provided by Pakistan Institute of Development Economics in its journal The Pakistan Development Review.

Volume (Year): 45 (2006)
Issue (Month): 3 ()
Pages: 369-381
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Handle: RePEc:pid:journl:v:45:y:2006:i:3:p:369-381

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Related research
Keywords: Stock Return Predictability Unobserved Components Fat Tails Stable Distributions

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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    Other versions:
  2. Akgiray, Vedat & Booth, G Geoffrey, 1988. "The Stable-Law Model of Stock Returns," Journal of Business & Economic Statistics, American Statistical Association, vol. 6(1), pages 51-57, January.
  3. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July. [Downloadable!] (restricted)
  4. Prasad Bidarkota & Khurshid M. Kiani, 2004. "No Predictable Components in G7 Stock Returns," Working Papers 0416, Florida International University, Department of Economics. [Downloadable!]
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    Other versions:
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  13. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333. [Downloadable!] (restricted)
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  14. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October. [Downloadable!] (restricted)
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