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The Predictability of KLSE CI Stock Index Futures Returns and The Conditional Multifactor APT Model

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  • J. L. Ford
  • Wee Ching Pok
  • S. Poshakwale

Abstract

Numerous studies have shown that returns on stocks and futures can to some extent be predicted over time, and that for developed financial markets, the predictions are compatible with the beta-asset pricing (APT) paradigm. Increasingly more studies have been undertaken of the veracity of such a paradigm in emerging markets. It has been contended that the paradigm is inapplicable to those markets and will, in any event, be unable to account for predicted asset returns. In this study we consider the Stock Exchange futures market in Malaysia, which has been neglected in the literature. Our econometric findings (using GMM) indicate that the APT model can be used as a rationale for the predictability of asset returns using local information, with the betas’ being constant and the expected risk premia being time-varying.

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Bibliographic Info

Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 06-09.

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Length: 28 pages
Date of creation: Jan 2006
Date of revision:
Handle: RePEc:bir:birmec:06-09

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  1. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
  2. Perron, P., 1990. "Further Evidence On Breaking Trend Functions In Macroeconomics Variables," Papers 350, Princeton, Department of Economics - Econometric Research Program.
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  4. Harvey, Campbell R, 1995. "The Risk Exposure of Emerging Equity Markets," World Bank Economic Review, World Bank Group, vol. 9(1), pages 19-50, January.
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  8. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc.
  9. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-66.
  10. Bessembinder, Hendrik & Chan, Kalok, 1992. "Time-varying risk premia and forecastable returns in futures markets," Journal of Financial Economics, Elsevier, vol. 32(2), pages 169-193, October.
  11. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December.
  12. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  13. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October.
  14. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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