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Testing the Predictability of Stock Returns

Author

Listed:
  • Lanne, M.

Abstract

Previous literature indicates that stock returns are predictable by several strongly autocorrelated forecasting variables, especially at longer horizons. It is suggested that this finding is spurious and follows from a neglected near unit root problem. Instead of the commonly used t test we propose a test that can be considered as a general test of whether the return can be predicted by any highly presistent variable. Using this test no predictablility is found for US stock return data from the period 1928-1996. Simulation experiments show that the standard t test clearly overrejects while our proposed test controls size much better.

Suggested Citation

  • Lanne, M., 2000. "Testing the Predictability of Stock Returns," University of Helsinki, Department of Economics 488, Department of Economics.
    • Handle: RePEc:fth:helsec:488
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    Keywords

    TESTS ; FORECASTS ; MODELS;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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