Testing the Predictability of Stock Returns
AbstractPrevious literature indicates that stock returns are predictable by several strongly autocorrelated forecasting variables, especially at longer horizons. It is suggested that this finding is spurious and follows from a neglected near unit root problem. Instead of the commonly used t test we propose a test that can be considered as a general test of whether the return can be predicted by any highly presistent variable. Using this test no predictablility is found for US stock return data from the period 1928-1996. Simulation experiments show that the standard t test clearly overrejects while our proposed test controls size much better.
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Bibliographic InfoPaper provided by Department of Economics in its series University of Helsinki, Department of Economics with number 488.
Length: 20 pages
Date of creation: 2000
Date of revision:
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Postal: University of Helsinki; Department of Economics, P.O.Box 54 (Unioninkatu 37) FIN-00014 Helsingin Yliopisto
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Web page: http://www.helsinki.fi/politiikkajatalous/
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TESTS ; FORECASTS ; MODELS;
Other versions of this item:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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