Risk-return trade-off, information diffusion, and U.S. stock market predictability

Haibin Xie () and Shouyang Wang
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Haibin Xie: School of Banking and Finance, University of International Business and Economics, Beijing 100029, P. R. China
Shouyang Wang: #x2020;Academy of Mathematics and Systems Science, Academy of Sciences, Beijing 100190, P. R. China

International Journal of Financial Engineering (IJFE), 2015, vol. 02, issue 04, 1-20

Abstract: Recent academic literature in finance documents both risk-return trade-off and gradual information diffusion (ID). Motivated by these two financial theories, this paper proposes the ARCH-M model augmented by an ID indicator to forecast the U.S. stock market returns. Empirical studies performed on the monthly S&P500 index show that our approach is useful in both statistical and economic sense. Further analysis shows that the ID provides complementary information to risk-return trade-off effect. Our findings confirm that financial theories are valuable for stock return forecasting.

Keywords: Risk-return trade-off; information diffusion; market predictability; U.S. stock market (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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DOI: 10.1142/S2424786315500383

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