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Return Predictability Revisited

73 Pages Posted: 25 Feb 2007 Last revised: 19 Nov 2009

Ben Jacobsen

Tilburg University - TIAS School for Business and Society; New Zealand Institute of Advanced Study

Ben R. Marshall

Massey University - School of Economics and Finance

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: October 30, 2008

Abstract

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.

Keywords: observation interval, return predictability tests, market efficiency, gradual information diffusion, market timing, quantitative investment techniques, commodity

JEL Classification: C8, G1

Suggested Citation

Jacobsen, Ben and Marshall, Ben R. and Visaltanachoti, Nuttawat, Return Predictability Revisited (October 30, 2008). EFA 2007 Ljubljana Meetings Paper; 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1284856 or http://dx.doi.org/10.2139/ssrn.1284856

Ben Jacobsen (Contact Author)

Tilburg University - TIAS School for Business and Society ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

New Zealand Institute of Advanced Study ( email )

Auckland
New Zealand

Ben R. Marshall

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand
64 6 350 5799 (Phone)
64 6 350 5651 (Fax)

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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