Business conditions and nonrandom walk behaviour of US stocks and bonds returns

B. Jirasakuldech, Riza Emekter and Unro Lee

Applied Financial Economics, 2008, vol. 18, issue 8, 659-672

Abstract: If security returns are predictable due to rational variations in expected returns, as been argued by Fama and French (1989), then abnormal returns should follow a random walk process. This article investigates whether monthly abnormal returns on four US securities - high-grade corporate bonds, low-grade corporate bonds, large-cap stocks and small-cap stocks - exhibit a random walk pattern. Abnormal returns on these securities are derived from regressing excess security returns on three proxies of business condition (term premium (TRISK), default premium (DRISK) and dividend yield (DIVYLD)) and federal funds rate (FedFund). Four alternative test procedures - variance ratio test, nonparametric runs test, Markov chain test and time reversibility tests - are employed. This study finds that abnormal returns on all securities, with the exception of high-grade corporate bonds, exhibit nonrandom pattern between 1973 and 2002, suggesting that these four common risk factors cannot capture the time-varying returns of both stocks and bonds.

Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603100701222242 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:apfiec:v:18:y:2008:i:8:p:659-672

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603100701222242

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().