A Recursive Modelling Approach to Predicting UK Stock Returns
This paper applies an extended and generalised version of the recursive modelling strategy developed in Persaran and Timmermann (1995) to the UK stock market. The focus of the analysis is to simulate investors search in in real time for a model that can forecast stock returns. It demonstrates the extent to which monthly stock returns in the UK were predictable over the period 1970-1993 after allowing for model specification uncertainly and possible shifts in the forecasting model. Due to a set of unique historical circumstances, UK stock returns were extremely volatile in 1974-1975, and we discuss how to design a modelling approach capable to accounting for this an similar low probability events. We find evidence of predictability in UK stock returns which could have been exploited by investors to improve on the risk-return trade-off offered by a passive strategy in the market portfolio. Alternative interpretations of this finding are briefly discussed.
When requesting a correction, please mention this item's handle: RePEc:fmg:fmgdps:dp322. 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: (The FMG Administration)
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.