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On the Predictability of Stock Returns in Real Time

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Author Info

  • Michael Cooper

    (Purdue University)

  • Roberto C. Gutierrez, Jr.

    (University of Oregon)

  • Bill Marcum

    (Wake Forest University)

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    Abstract

    Researchers have documented an abundance of evidence that stock returns are predictable ex post facto. In this study, we address the ex ante predictability of the cross section of stock returns by investigating whether a real-time investor could have used book-to-market equity, firm size, and one-year lagged returns to generate portfolio profits during the 197497 period. We develop variations on common recursive out-of-sample methods and demonstrate a marked difference between ex post and ex ante predictability, suggesting that the current notion of predictability in the literature is exaggerated.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 78 (2005)
    Issue (Month): 2 (March)
    Pages: 469-500

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    Handle: RePEc:ucp:jnlbus:v:78:y:2005:i:2:p:469-500

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Kathleen Fuller & Bonnie Ness & Robert Ness, 2010. "Is information risk priced for NASDAQ-listed stocks?," Review of Quantitative Finance and Accounting, Springer, vol. 34(3), pages 301-312, April.
    2. Döpke, Jörg & Hartmann, Daniel & Pierdzioch, Christian, 2008. "Real-time macroeconomic data and ex ante stock return predictability," International Review of Financial Analysis, Elsevier, vol. 17(2), pages 274-290.
    3. Pierdzioch, Christian & Schertler, Andrea, 2008. "Investing in European stock markets for high-technology firms," Global Finance Journal, Elsevier, vol. 18(3), pages 400-415.
    4. Todd E. Clark & Kenneth D. West, 2005. "Approximately normal tests for equal predictive accuracy in nested models," Research Working Paper RWP 05-05, Federal Reserve Bank of Kansas City.
    5. Steven Liew Woon Choy & Jayaraman Munusamy & Shankar Chelliah & Ally Mandari, 2011. "Effects of Financial Distress Condition on the Company Performance: A Malaysian Perspective," Review of Economics & Finance, Better Advances Press, Canada, vol. 1, pages 85-99, August.
    6. Stefan Nagel, 2013. "Empirical Cross-Sectional Asset Pricing," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 167-199, November.
    7. Andrew Ang & Joseph Chen, 2005. "CAPM Over the Long Run: 1926-2001," NBER Working Papers 11903, National Bureau of Economic Research, Inc.
    8. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2009. "Time and risk diversification in real estate investments: assessing the ex post economic value," Working Papers 2009-001, Federal Reserve Bank of St. Louis.
    9. Yufeng Han, 2010. "On the Economic Value of Return Predictability," Annals of Economics and Finance, Society for AEF, vol. 11(1), pages 1-33, May.
    10. Biais, Bruno & Bossaerts, Peter & Spatt, Chester, 2009. "Equilibrium Asset Pricing and Portofolio Choice Under Asymmetric Information," TSE Working Papers 09-018, Toulouse School of Economics (TSE).
    11. Rapach, David E. & Wohar, Mark E., 2006. "In-sample vs. out-of-sample tests of stock return predictability in the context of data mining," Journal of Empirical Finance, Elsevier, vol. 13(2), pages 231-247, March.
    12. Marshall, Ben R. & Visaltanachoti, Nuttawat, 2010. "The Other January Effect: Evidence against market efficiency?," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2413-2424, October.
    13. Paye, Bradley S. & Timmermann, Allan, 2006. "Instability of return prediction models," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 274-315, June.
    14. Anton Bekkerman, 2011. "Time-varying hedge ratios in linked agricultural markets," Agricultural Finance Review, Emerald Group Publishing, vol. 71(2), pages 179-200, July.

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