Small-sample tests for stock return predictability with possibly non-stationary regressors and GARCH-type effects

Sermin Gungor and Richard Luger

Journal of Econometrics, 2020, vol. 218, issue 2, 750-770

Abstract: We develop a simulation-based procedure to test for stock return predictability with multiple regressors. The process governing the regressors is left completely free and the test procedure remains valid in small samples even in the presence of non-normalities and GARCH-type effects in the stock returns. The usefulness of the new procedure is demonstrated in a simulation study and by examining the ability of a group of financial variables to predict excess stock returns. We find some evidence of predictability during the period 1948–2014, driven entirely by the term spread. This empirical evidence, however, is much weaker over subsamples.

Keywords: Stock returns; Predictive regression; Multiple predictors; Unit roots; Conditional heteroskedasticity; Robust inference (search for similar items in EconPapers)
JEL-codes: C12 C32 G14 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:218:y:2020:i:2:p:750-770

DOI: 10.1016/j.jeconom.2020.04.037

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