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A State-Space Model Of Short- And Long-Horizon Stock Returns

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  • Chunsheng Zhou
  • Chang Qing

Abstract

In this article we propose a new parsimonious state-space model in which state variables characterize the stochastic movements of stock returns. Using the equally weighted and decile monthly stock returns, we show that (a) a parsimonious state-space model characterizes the variation in expected returns at any horizon; (b) the extracted expected returns explain a substantial proportion of the variance in realized returns, and the magnitude of this proportion increases significantly with the horizon of returns; (c) the model successfully captures the empirical fact that returns of smaller firms have both stronger positive autocorrelations of short-horizon returns and stronger negative autocorrelations of long-horizon returns; and (d) the forecasts of asset returns obtained with the state-space model subsume the information in other potential predictor variables such as dividend yields.
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  • Chunsheng Zhou & Chang Qing, 2000. "A State-Space Model Of Short- And Long-Horizon Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 23(4), pages 523-544, December.
  • Handle: RePEc:bla:jfnres:v:23:y:2000:i:4:p:523-544
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    File URL: http://hdl.handle.net/10.1111/j.1475-6803.2000.tb00758.x
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    References listed on IDEAS

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