Modelling real capital gains in the UK stock market

Ashok Parikh and David Lovatt

Applied Economics Letters, 1998, vol. 5, issue 6, 337-342

Abstract: The purpose of this study is to establish the determinants of stock market returns for the UK market and to forecast the real capital gain for the Financial Times All-share index using monthly data for the period 1980-1994. Three models are used: (a) a model based on Fama's approach including expectations' variables for the growth of GDP and inflation; (b) a model where short-run and long-run impacts are separately treated and (c) an ARCH model where volatility in returns is modelled using conditional variance. One-period ahead forecasts from the general autoregressive-distributed lag model and ARCH model are compared with actuals for the post-sample period (December 1992 to November 1993) and we find that the latter model has a higher predictive power than the former.

Date: 1998
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DOI: 10.1080/135048598354672

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