Two Tales of Return Predictability: The Case of Asia–Pacific Equity Markets

Andrei Shynkevich

Journal of Forecasting, 2017, vol. 36, issue 3, 257-272

Abstract: If past prices can successfully predict future price movements, it would contradict the notion of weak‐form market efficiency. Return predictability can be assessed via a variety of random walk statistical tests or via the application of mechanical trading rules. Findings of return predictability and state of market efficiency are compared by applying a battery of popular random walk statistical tests and a large set of mechanical trading rules to a family of equity indexes in Asia–Pacific equity markets over a 20‐year period of time. Inferences drawn from different random walk based econometric tests of market efficiency often disagree among themselves and tend to exaggerate the extent of predictability in returns. Testing of return predictability via a set of mechanical trading rules allows one to account for a possible data snooping bias, error measurements due to nonsynchronous trading and market frictions such as trading costs. Persistent predictability of returns that cannot be explained by the combination of data snooping bias, nonsynchronicity bias and moderate level of transaction costs is found in just two emerging equity markets in the region. Copyright © 2016 John Wiley & Sons, Ltd.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jforec:v:36:y:2017:i:3:p:257-272

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