Stock Return Predictability and the Adaptive Markets Hypothesis: Evidence from Century Long U.S. Data
Jae H. Kim
La Trobe University; Financial Research Network (FIRN)
Monash University - Department of Econometrics & Business Statistics; Universiti Malaysia Sabah
University of Newcastle
January 24, 2010
Finance and Corporate Governance Conference 2010 Paper
We study return predictability of the Dow Jones Industrial Average indices from 1900 to 2009. We find strong evidence that time-varying return predictability is driven by changing market conditions, consistent with the implications of the adaptive markets hypothesis. During market crashes, no return predictability is observed, but an extreme degree of uncertainty is associated with return predictability. During fundamental economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty. During economic bubbles, return predictability and its uncertainty have been smaller than normal times.
Number of Pages in PDF File: 29
Keywords: Economic bubbles, Fundamental crises, Financial crises, Market
JEL Classification: G12, G14, G15working papers series
Date posted: January 26, 2010
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