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Predicting Stock Returns in an Efficient Market
Author(s) -
BALVERS RONALD J.,
COSIMANO THOMAS F.,
MCDONALD BILL
Publication year - 1990
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1990.tb02429.x
Subject(s) - economics , stock (firearms) , stock market , econometrics , general equilibrium theory , aggregate (composite) , capital asset pricing model , consumption (sociology) , financial market , microeconomics , finance , mechanical engineering , paleontology , social science , materials science , horse , sociology , engineering , composite material , biology
An intertemporal general equilibrium model relates financial asset returns to movements in aggregate output. The model is a standard neoclassical growth model with serial correlation in aggregate output. Changes in aggregate output lead to attempts by agents to smooth consumption, which affects the required rate of return on financial assets. Since aggregate output is serially correlated and hence predictable, the theory suggests that stock returns can be predicted based on rational forecasts of output. The empirical results confirm that stock returns are a predictable function of aggregate output and also support the accompanying implications of the model.