Non-linear long horizon returns predictability: evidence from six south-east Asian markets
Whilst the existence of long-horizon returns predictability has been a recurrent theme in empirical finance research, extant work has focused almost exclusively on the US, and more recent work has cast doubt over the validity of such potential predictability due to non-stationarity and serial correlation in the data. The present paper examines long-horizon returns predictability in six South-East Asian markets in the context of unit root tests conducted under corrections for serial correlation and heteroscedasticity. The analysis conducted also extends the investigation of long-horizon predictability to the non-linear setting, and examines whether any detected non-linear predictability is consistent with behavioural approaches to asset pricing which emphasise the role of noise traders. The results obtained suggest the following conclusions. First, long-horizon predictability is present in each of the six South-East Asian markets considered. Second, whilst forecast power increases with horizon, for the majority of series it is maximised for forecast horizons of between 12 and 48 months. Third, non-linear predictability is reported for all series, suggesting that positive and negative values of the (demeaned) dividend yield impart different levels of predictability for returns at different forecast horizons. However, there is no consistency in the pattern of non-linearity reported, and whilst the observed patterns are consistent with noise traders models for some of the markets considered, this is not true of all the markets considered. Nevertheless, the non-linear dynamics detected are suggestive of potential market inefficiencies in all six cases. Copyright Springer Science+Business Media, LLC 2006
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 13 (2006)
Issue (Month): 2 (June)
|Contact details of provider:|| Web page: http://springerlink.metapress.com/link.asp?id=102851|
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.:
- Shively, Philip A., 2003. "The nonlinear dynamics of stock prices," The Quarterly Review of Economics and Finance, Elsevier, vol. 43(3), pages 505-517.
- Lanne, M., 2000.
"Testing the Predictability of Stock Returns,"
University of Helsinki, Department of Economics
488, Department of Economics.
- Mark E. Wohar & David E. Rapach, 2005. "Valuation ratios and long-horizon stock price predictability," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 327-344.
- John Y. Campbell & Robert J. Shiller, 2001.
"Valuation Ratios and the Long-Run Stock Market Outlook: An Update,"
NBER Working Papers
8221, National Bureau of Economic Research, Inc.
- John Y. Campbell & Robert J. Shiller, 2001. "Valuation Ratios and the Long-run Stock Market Outlook: An Update," Cowles Foundation Discussion Papers 1295, Cowles Foundation for Research in Economics, Yale University.
- John Y. Campbell & Motohiro Yogo, 2003.
"Efficient Tests of Stock Return Predictability,"
NBER Working Papers
10026, National Bureau of Economic Research, Inc.
- Campbell, John & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Scholarly Articles 3122601, Harvard University Department of Economics.
- John Y. Campbell & Motohiro Yogo, 2002. "Efficient Tests of Stock Return Predictability," Harvard Institute of Economic Research Working Papers 1972, Harvard - Institute of Economic Research.
- Maasoumi, Esfandiar & Racine, Jeff, 2002. "Entropy and predictability of stock market returns," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 291-312, March.
- Serena Ng & Pierre Perron, 1997.
"Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power,"
Boston College Working Papers in Economics
369, Boston College Department of Economics, revised 01 Sep 2000.
- Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
- Fang, Yue & Xu, Daming, 2003. "The predictability of asset returns: an approach combining technical analysis and time series forecasts," International Journal of Forecasting, Elsevier, vol. 19(3), pages 369-385.
- Gabriel Perez-Quiros & Allan Timmermann, 2000.
"Firm Size and Cyclical Variations in Stock Returns,"
Journal of Finance,
American Finance Association, vol. 55(3), pages 1229-1262, 06.
- Allan Timmermann & Gabriel Perez-Quiros, 1999. "Firm Size and Cyclical Variations in Stock Returns," FMG Discussion Papers dp335, Financial Markets Group.
- Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
- David McMillan, 2001. "Non-Linear Predictability of Stock Market Returns: Evidence from Non-Parametric and Threshold Models," Discussion Paper Series, Department of Economics 200102, Department of Economics, University of St. Andrews.
- McMillan, David G., 2005. "Non-linear dynamics in international stock market returns," Review of Financial Economics, Elsevier, vol. 14(1), pages 81-91.
- Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
- Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996.
"Efficient Tests for an Autoregressive Unit Root,"
Econometric Society, vol. 64(4), pages 813-36, July.
- Tom Doan, . "ERSTEST: RATS procedure to perform Elliott-Rothenberg-Stock unit root tests," Statistical Software Components RTS00066, Boston College Department of Economics.
- Graham Elliott & Thomas J. Rothenberg & James H. Stock, 1992. "Efficient Tests for an Autoregressive Unit Root," NBER Technical Working Papers 0130, National Bureau of Economic Research, Inc.
- Tom Doan, . "GLSDETREND: RATS procedure to perform local to unity GLS detrending," Statistical Software Components RTS00077, Boston College Department of Economics.
- Valkanov, Rossen, 2003. "Long-horizon regressions: theoretical results and applications," Journal of Financial Economics, Elsevier, vol. 68(2), pages 201-232, May.
- Wolf, Michael, 2000. "Stock Returns and Dividend Yields Revisited: A New Way to Look at an Old Problem," Journal of Business & Economic Statistics, American Statistical Association, vol. 18(1), pages 18-30, January.
- Charlotte S. Hansen & Bjorn E. Tuypens, 2004. "Long-Run Regressions: Theory and Application to US Asset Markets," Finance 0410018, EconWPA.
- Leung, Mark T. & Daouk, Hazem & Chen, An-Sing, 2000. "Forecasting stock indices: a comparison of classification and level estimation models," International Journal of Forecasting, Elsevier, vol. 16(2), pages 173-190.
- Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
When requesting a correction, please mention this item's handle: RePEc:kap:apfinm:v:13:y:2006:i:2:p:95-111. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla)or (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.