Stock Return Predictability at Bovespa: a Test Involving the Expected Return Factor Model

Luciano Martin Rostagno (), Gilberto de Oliveira Kloeckner () and João Luiz Becker ()
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Luciano Martin Rostagno: EA/UFRGS; Dept Economics, Iowa State University
Gilberto de Oliveira Kloeckner: EA/UFRGS

Brazilian Review of Finance, 2004, vol. 2, issue 2, 183-206

Abstract: This paper examines the hypothesis of asst return predictability in the Brazilian Stock Market (Bovespa). Evidence suggests that seven factors explain most of the monthly differential returns of the stocks included in the sample. Within the factors that present statistically significant mean, two are liquidity factors (market capitalization and trading volume trend), three refer to price level of stocks (dividend to price, dividend to price trend, and cash flow to price), and two relate to price history of stocks (3 and 12 months excess return). Contradicting theoretical assumptions, risk factors present no explanatory power on cross-sectional returns. Using an expected return factor model, it is contended that stock returns are quite predictable. An investment simulation shows that the model is able to assemble portfolios with statistically significant higher returns. Additional tests indicate that the winner portfolios are not fundamentally riskier suggesting mispricing of assets in the Brazilian stock Market.

Keywords: market efficiency; return predictability; financial markets (search for similar items in EconPapers)
JEL-codes: G12 G14 G15 (search for similar items in EconPapers)
Date: 2004
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:2:y:2004:i:2:p:183-206

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