Testing the Predictability of Stock Returns

Markku Lanne

University of Helsinki, Department of Economics from Department of Economics

Abstract: Previous literature indicates that stock returns are predictable by several strongly autocorrelated forecasting variables, especially at longer horizons. It is suggested that this finding is spurious and follows from a neglected near unit root problem. Instead of the commonly used t test we propose a test that can be considered as a general test of whether the return can be predicted by any highly presistent variable. Using this test no predictablility is found for US stock return data from the period 1928-1996. Simulation experiments show that the standard t test clearly overrejects while our proposed test controls size much better.

Keywords: TESTS; FORECASTS; MODELS (search for similar items in EconPapers)
JEL-codes: C22 G14 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2000
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:fth:helsec:488

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