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Predictability of Stock Returns: Robustness and Economic Significance
Author(s) -
PESARAN M. HASHEM,
TIMMERMANN ALLAN
Publication year - 1995
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.1540-6261.1995.tb04055.x
Subject(s) - predictability , economics , stock (firearms) , robustness (evolution) , transaction cost , predictive power , volatility (finance) , financial economics , monetary economics , stock market , econometrics , finance , mathematics , biochemistry , statistics , chemistry , gene , mechanical engineering , paleontology , philosophy , epistemology , horse , biology , engineering
ABSTRACT This article examines the robustness of the evidence on predictability of U.S. stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy‐and‐hold strategy in the market index. We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns. The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960s, but increased to a level where, net of transaction costs, it could have been exploited by investors in the volatile markets of the 1970s.