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No Predictable Components in G7 Stock Returns

  • Prasad Bidarkota

    ()

    (Department of Economics, Florida International University)

  • Khurshid M. Kiani

    (Department of Economics, Wilfrid Laurier University)

We search for time-varying predictable components in monthly excess stock index returns over the risk free rates in the G7 countries. The predictable components provide an estimate of the expected excess returns. Our unobserved components model improves on Conrad and Kaul (1988) by taking into account fat tails widely documented in returns data. Statistical hypotheses tests fail to reveal any significant time-varying predictable components in excess returns for any of the countries, except Canada. Our results are in sharp contrast to Conrad and Kaul (1988), who do isolate time-varying expected returns in weekly sizeweighted portfolio returns using the same methodology but in a Gaussian setting.

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File URL: http://casgroup.fiu.edu/pages/docs/2245/1280267983_04-16.pdf
File Function: First version, 2004
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Paper provided by Florida International University, Department of Economics in its series Working Papers with number 0416.

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Length: 26 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:fiu:wpaper:0416
Contact details of provider: Postal: Miami, FL 33199
Phone: (305) 348-2316
Fax: (305) 348-1524
Web page: http://casgroup.fiu.edu/Economics/

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  1. repec:dgr:kubcen:1998142 is not listed on IDEAS
  2. Durbin, J. & Koopman, S.J.M., 1998. "Time Series Analysis of Non-Gaussian Observations Based on State Space Models from Both Classical and Bayesian Perspectives," Discussion Paper 1998-142, Tilburg University, Center for Economic Research.
  3. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1988. "Mean Reversion in Equilibrium Asset Prices," NBER Working Papers 2762, National Bureau of Economic Research, Inc.
  4. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
  5. Hansen, Bruce E, 1992. "The Likelihood Ratio Test under Nonstandard Conditions: Testing the Markov Switching Model of GNP," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S61-82, Suppl. De.
  6. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  7. Andrews, Donald W K, 2001. "Testing When a Parameter Is on the Boundary of the Maintained Hypothesis," Econometrica, Econometric Society, vol. 69(3), pages 683-734, May.
  8. Prasad Bidarkota & J Huston Mcculloch, 2004. "Testing for persistence in stock returns with GARCH-stable shocks," Quantitative Finance, Taylor & Francis Journals, vol. 4(3), pages 256-265.
  9. Conrad, Jennifer & Kaul, Gautam, 1988. "Time-Variation in Expected Returns," The Journal of Business, University of Chicago Press, vol. 61(4), pages 409-25, October.
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