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Feedback Trading and Predictability of Stock Returns in Germany, 1880-1913

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  • Christian Pierdzioch

Abstract

I use a time-varying parameter model in order to study the predictability of monthly real stock returns in Germany over the period 1880–1913. I find that the extent to which returns were predictable underwent significant changes over time. Specifically, predictability of returns, as measured by their first-order autocorrelation coefficient, was positive most of the time. It tended to be significant during extended periods of stock market decline, but not during periods of stock market increase. I argue that this time-pattern of predictability of returns is consistent with feedback effects of futures trading on the spot market.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1213.

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Length: 26 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:kie:kieliw:1213

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Keywords: Stock market; Return Predictability; Germany;

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References

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  1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers, University of California at Berkeley, Economics Department _124, University of California at Berkeley, Economics Department.
  2. Goetzmann, William Nelson, 1993. "Patterns in Three Centuries of Stock Market Prices," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 66(2), pages 249-70, April.
  3. Zalewska-Mitura, Anna & Hall, Stephen G., 1999. "Examining the first stages of market performance: a test for evolving market efficiency," Economics Letters, Elsevier, Elsevier, vol. 64(1), pages 1-12, July.
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  8. Koutmos, Gregory, 1997. "Feedback trading and the autocorrelation pattern of stock returns: further empirical evidence," Journal of International Money and Finance, Elsevier, Elsevier, vol. 16(4), pages 625-636, August.
  9. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B, University of Bonn, Germany 437, University of Bonn, Germany, revised Jul 1998.
  10. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, American Finance Association, vol. 25(2), pages 383-417, May.
  11. Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics And The Role Of Feedback Traders," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 545, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Sentana, Enrique & Wadhwani, Sushil B, 1992. "Feedback Traders and Stock Return Autocorrelations: Evidence from a Century of Daily Data," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 102(411), pages 415-25, March.
  13. Rockinger, Michael & Urga, Giovanni, 2001. "A Time-Varying Parameter Model to Test for Predictability and Integration in the Stock Markets of Transition Economies," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(1), pages 73-84, January.
  14. Andrew W. Lo & Craig A. MacKinlay, . "An Econometric Analysis of Nonsyschronous-Trading," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 19-89, Wharton School Rodney L. White Center for Financial Research.
  15. Robert J. Shiller, 1984. "Stock Prices and Social Dynamics," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 719R, Cowles Foundation for Research in Economics, Yale University.
  16. Choudhry, Taufiq, 2001. "Month of the Year Effect and January Effect in Pre-WWI Stock Returns: Evidence from a Non-linear GARCH Model," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 6(1), pages 1-11, January.
  17. Harrison, Paul, 1998. "Similarities in the Distribution of Stock Market Price Changes between the Eighteenth and Twentieth Centuries," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 71(1), pages 55-79, January.
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