Robust Econometric Inference for Stock Return Predictability

120 Pages Posted: 2 Nov 2014

See all articles by Alexandros Kostakis

Alexandros Kostakis

University of Liverpool - Management School (ULMS); The University of Manchester - Manchester Business School

Tassos Magdalinos

University of Southampton

Michalis P. Stamatogiannis

University of Liverpool Management School

Date Written: October 31, 2014

Abstract

This study examines stock return predictability via lagged financial variables with unknown stochastic properties. We conduct a battery of predictability tests for US stock returns during the 1927-2012 period, proposing a novel testing procedure which: i) robustifies inference to the degree of persistence of the employed regressors, ii) accommodates testing the joint predictive ability of financial variables in multiple regression, iii) is easy to implement as it is based on a linear estimation procedure and iv) can be also used for long-horizon predictability tests. We provide some evidence in favor of short-horizon predictability in the full sample period. Nevertheless, this evidence almost entirely disappears in the post-1952 period. Moreover, predictability becomes weaker, not stronger, as the predictive horizon increases.

Keywords: Stock returns, Predictability, Persistent regressors, Robust inference

Suggested Citation

Kostakis, Alexandros and Magdalinos, Tassos and Stamatogiannis, Michalis P., Robust Econometric Inference for Stock Return Predictability (October 31, 2014). Available at SSRN: https://ssrn.com/abstract=2517662 or http://dx.doi.org/10.2139/ssrn.2517662

Alexandros Kostakis (Contact Author)

University of Liverpool - Management School (ULMS) ( email )

Chatham Building
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://www.alexkostakis.com

The University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Tassos Magdalinos

University of Southampton ( email )

University Rd.
Southampton SO17 1BJ, Hampshire SO17 1LP
United Kingdom

Michalis P. Stamatogiannis

University of Liverpool Management School ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/michail-stamatogiannis/

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