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No Predictable Components in G7 Stock Returns

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Author Info
Prasad Bidarkota () (Department of Economics, Florida International University)
Khurshid M. Kiani (Department of Economics, Wilfrid Laurier University)

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Abstract

We search for time-varying predictable components in monthly excess stock index returns over the risk free rates in the G7 countries. The predictable components provide an estimate of the expected excess returns. Our unobserved components model improves on Conrad and Kaul (1988) by taking into account fat tails widely documented in returns data. Statistical hypotheses tests fail to reveal any significant time-varying predictable components in excess returns for any of the countries, except Canada. Our results are in sharp contrast to Conrad and Kaul (1988), who do isolate time-varying expected returns in weekly sizeweighted portfolio returns using the same methodology but in a Gaussian setting.

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File URL: http://www.fiu.edu/orgs/economics/wp2004/04-16.pdf
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File Function: First version, 2004
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Publisher Info
Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0416.

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Length: 26 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:fiu:wpaper:0416

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Related research
Keywords: stock return predictability; unobserved components; fat tails; stable distributions;

Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1990. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. J. Durbin & S. J. Koopman, 2000. "Time series analysis of non-Gaussian observations based on state space models from both classical and Bayesian perspectives," Journal Of The Royal Statistical Society Series B, Royal Statistical Society, vol. 62(1), pages 3-56. [Downloadable!] (restricted)
    Other versions:
  3. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De. [Downloadable!] (restricted)
  4. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02. [Downloadable!] (restricted)
  5. Andrews, Donald W K, 2001. "Testing When a Parameter Is on the Boundary of the Maintained Hypothesis," Econometrica, Econometric Society, vol. 69(3), pages 683-734, May.
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  6. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October. [Downloadable!] (restricted)
  7. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Khurshid M. Kiani, 2006. "Predictability in Stock Returns in an Emerging Market: Evidence from KSE 100 Stock Price Index," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 45(3), pages 369-381. [Downloadable!]
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