Testing for Persistence in Stock Returns with GARCH-Stable Shocks
Prasad V. Bidarkota
Florida International University (FIU) - Department of Economics
J. Huston Mcculloch
Ohio State University; National Bureau of Economic Research (NBER)
October 31, 2003
We investigate persistence in CRSP monthly excess stock returns, using a state space model with stable disturbances. The non-Gaussian state space model with volatility persistence is estimated by maximum likelihood, using the optimal filtering algorithm given by Sorenson and Alspach (1971). The conditional distribution has a stable index alpha of 1.89, and normality is strongly rejected even after accounting for GARCH. However, stock returns do not contain a significant mean-reverting component. The optimal predictor is the unconditional expectation of the series, which we estimate to be 9.8 percent per annum.
Number of Pages in PDF File: 42
Keywords: stock returns, predictability, state space models, volatility persistence, non-normality, stable distributions
JEL Classification: C22, C53, G14working papers series
Date posted: November 28, 2003
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