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

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Author Info
J. L. Ford, Wee Ching Pok and 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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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
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Handle: RePEc:bir:birmec:06-09

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  1. Harvey, Campbell R, 1995. "Predictable Risk and Returns in Emerging Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 8(3), pages 773-816. [Downloadable!] (restricted)
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  2. Ferson, Wayne E & Korajczyk, Robert A, 1995. "Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?," Journal of Business, University of Chicago Press, vol. 68(3), pages 309-49, July. [Downloadable!] (restricted)
  3. Connor, Gregory, 1984. "A unified beta pricing theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 13-31, October. [Downloadable!] (restricted)
  4. Perron, Pierre, 1997. "Further evidence on breaking trend functions in macroeconomic variables," Journal of Econometrics, Elsevier, vol. 80(2), pages 355-385, October. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. Joëlle Miffre, 2001. "Efficiency in the Pricing of the FTSE 100 Futures Contract," European Financial Management, Blackwell Publishing Ltd, vol. 7(1), pages 9-22. [Downloadable!] (restricted)
  7. Ross, Stephen A., 1976. "The arbitrage theory of capital asset pricing," Journal of Economic Theory, Elsevier, vol. 13(3), pages 341-360, December. [Downloadable!] (restricted)
  8. 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. [Downloadable!] (restricted)
  9. Harvey, Campbell R, 1995. "The Risk Exposure of Emerging Equity Markets," World Bank Economic Review, Oxford University Press, vol. 9(1), pages 19-50, January.
  10. Miffre, Joelle, 2002. "The Predictability of Futures Returns: Rational Variation in Required Returns or Market Inefficiency?," Applied Financial Economics, Taylor and Francis Journals, vol. 12(10), pages 715-24, October. [Downloadable!] (restricted)
  11. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 6(3), pages 527-66. [Downloadable!] (restricted)
  12. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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