Small Levels of Predictability and Large Economic Gains

41 Pages Posted: 12 May 2003

See all articles by Yexiao Xu

Yexiao Xu

University of Texas at Dallas - School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 2002

Abstract

Small-return predictability in the stock market has been widely documented in empirical studies, yet little has been written on its economic importance. This paper examines the issue through profitability on a trading strategy that utilizes small levels of predictability and analyzes the statistical distribution for returns achieved under such a strategy. Our results suggest that small-return predictability is economically significant in the sense that such trading strategies not only yield high returns but also are less risky under a fat tail distribution assumption. Quantitatively, we demonstrate that such a strategy could have doubled the market return for the period 1952 to 1998. We investigate reliability of our results through simulation and bootstrapping.

JEL Classification: C16, G10, G14

Suggested Citation

Xu, Yexiao, Small Levels of Predictability and Large Economic Gains (March 2002). Available at SSRN: https://ssrn.com/abstract=398440 or http://dx.doi.org/10.2139/ssrn.398440

Yexiao Xu (Contact Author)

University of Texas at Dallas - School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
972-883-6703 (Phone)

HOME PAGE: http://www.utdallas.edu/~yexiaoxu

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