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Unit-Root Test and Excess Returns

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  • Marie-Josée Godbout
  • Simon van Norden

Abstract

Several recent papers have presented evidence from foreign exchange and other markets suggesting that the log of excess returns can be characterized as first-order integrated processes (I(1)). This contrasts sharply with the "conventional" wisdom that log prices are integrated of order one I(1) and that log returns should therefore be integrated of order zoro I(0), and even more sharply with the view that past returns have no ability to predict future returns (weak market efficiency). It has been suggested that this should be interpreted as evidence of the importance of regime- switching in asset prices, since such non linear processes can produce these results even when returns are truly I(0). This paper syggests an alternative interpretation.

Suggested Citation

  • Marie-Josée Godbout & Simon van Norden, 1996. "Unit-Root Test and Excess Returns," Staff Working Papers 96-10, Bank of Canada.
    • Handle: RePEc:bca:bocawp:96-10
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    References listed on IDEAS

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    Cited by:

    1. Eric Zivot, 1998. "Cointegration and Forward and Spot Exchange Rate Regressions," Econometrics 9812001, University Library of Munich, Germany.
    2. Zivot, Eric, 2000. "Cointegration and forward and spot exchange rate regressions," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 785-812, December.
    3. Joseph Atta-Mensah, 2004. "Money Demand and Economic Uncertainty," Staff Working Papers 04-25, Bank of Canada.

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    More about this item

    Keywords

    FINANCIAL MARKET; UNIT ROOTS; PRICES;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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