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Stock Return Predictability at Bovespa: a Test Involving the Expected Return Factor Model

Author

Listed:
  • Luciano Martin Rostagno

    (EA/UFRGS; Dept Economics, Iowa State University)

  • Gilberto de Oliveira Kloeckner

    (EA/UFRGS)

  • João Luiz Becker

Abstract

This paper examines the hypothesis of asst return predictability in the Brazilian Stock Market (Bovespa). Evidence suggests that seven factors explain most of the monthly differential returns of the stocks included in the sample. Within the factors that present statistically significant mean, two are liquidity factors (market capitalization and trading volume trend), three refer to price level of stocks (dividend to price, dividend to price trend, and cash flow to price), and two relate to price history of stocks (3 and 12 months excess return). Contradicting theoretical assumptions, risk factors present no explanatory power on cross-sectional returns. Using an expected return factor model, it is contended that stock returns are quite predictable. An investment simulation shows that the model is able to assemble portfolios with statistically significant higher returns. Additional tests indicate that the winner portfolios are not fundamentally riskier suggesting mispricing of assets in the Brazilian stock Market.

Suggested Citation

  • Luciano Martin Rostagno & Gilberto de Oliveira Kloeckner & João Luiz Becker, 2004. "Stock Return Predictability at Bovespa: a Test Involving the Expected Return Factor Model," Brazilian Review of Finance, Brazilian Society of Finance, vol. 2(2), pages 183-206.
    • Handle: RePEc:brf:journl:v:2:y:2004:i:2:p:183-206
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    More about this item

    Keywords

    market efficiency; return predictability; financial markets;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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