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A Recursive Modelling Approach to Predicting UK Stock Returns'

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  • Pesaran, M. H.
  • Timmermann, A.

Abstract

Using a recursive modelling procedure which generalises existing methods for simulating investors' search in `real time' for a model that can forecast stock returns, the authors demonstrate the extent to which monthly stock returns in the UK were predictable during the period 1970-1993. Owing to a set of unique historical circumstances, UK stock returns were extremely volatile in 1974-5, and the authors discuss how to design a modelling approach which aims to account for this episode. Evidence is found of both long-term and short-term predictability in UK stock returns, which could have been exploited by investors to improve on the risk-return trade-off offered by a passive strategy in the market portfolio.

Suggested Citation

  • Pesaran, M. H. & Timmermann, A., 1996. "A Recursive Modelling Approach to Predicting UK Stock Returns'," Cambridge Working Papers in Economics 9625, Faculty of Economics, University of Cambridge.
    • Handle: RePEc:cam:camdae:9625
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