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Forecasting stock returns an examination of stock market trading in the presence of transaction costs
Author(s) -
Pesaran M. Hashem,
Timmermann Allan
Publication year - 1994
Publication title -
journal of forecasting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.543
H-Index - 59
eISSN - 1099-131X
pISSN - 0277-6693
DOI - 10.1002/for.3980130402
Subject(s) - predictability , transaction cost , econometrics , economics , stock (firearms) , database transaction , market timing , stock market , basis point , trading strategy , variance (accounting) , financial economics , statistics , mathematics , computer science , finance , bond , portfolio , accounting , paleontology , mechanical engineering , horse , engineering , biology , programming language
The paper presents new evidence on the predictability of excess returns on common stocks for the Standard and Poor's 500 and the Dow Jones Industrial portfolios at the monthly, quarterly, and annual frequencies. It shows that recursive predictions obtained on the basis of the excess returns regressions are capable of correctly predicting a statistically significant proportion of the signs of the actual returns. The paper also shows that the switching portfolios constructed on the basis of the signs of the recursive predictions mean‐variance dominate the respective market portfolios when trading takes place on a quarterly or annual basis. This result holds even under a high transaction cost scenario. However, due to the larger number of transactions at the monthly frequency the monthly switching portfolios only mean‐variance dominate the respective market portfolios when transaction costs are zero or low.