Testing the Predictability of Stock Returns
University of Helsinki, Department of Economics from Department of Economics
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
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Journal Article: Testing The Predictability Of Stock Returns (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:fth:helsec:488
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