Return Predictability Revisited
New Zealand Institute of Advanced Study
Ben R. Marshall
Massey University - School of Economics and Finance
Massey University - Department of Economics and Finance
October 30, 2008
EFA 2007 Ljubljana Meetings Paper
21st Australasian Finance and Banking Conference 2008 Paper
Monthly stock market returns are predictable when we refine the observation intervals of the variables used to predict these returns. Contrary to other predictability studies we find high out-of-sample adjusted R2s of up to 7% using economically important commodity returns. Shorter intervals reveal predictability consistent with near efficient markets based on price changes in industrial metals. More historical intervals expose predictability consistent with gradual information diffusion based on energy series. This predictability is robust to data mining adjustment, the inclusion of control (including economic) variables, and unrelated to time-varying risk. Inflation explains part of this predictability, but not all.
Number of Pages in PDF File: 73
Keywords: observation interval, return predictability tests, market efficiency, gradual information diffusion, market timing, quantitative investment techniques, commodity
JEL Classification: C8, G1
Date posted: February 25, 2007 ; Last revised: November 19, 2009
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