Stock Return Predictability and the Adaptive Markets Hypothesis: Evidence from Century Long U.S. Data

29 Pages Posted: 26 Jan 2010

See all articles by Jae H. Kim

Jae H. Kim

La Trobe University - School of Economics and Finance

Kian-Ping Lim

Universiti Malaya

Abul Shamsuddin

University of Newcastle (Australia) - Newcastle Business School

Date Written: January 24, 2010

Abstract

We study return predictability of the Dow Jones Industrial Average indices from 1900 to 2009. We find strong evidence that time-varying return predictability is driven by changing market conditions, consistent with the implications of the adaptive markets hypothesis. During market crashes, no return predictability is observed, but an extreme degree of uncertainty is associated with return predictability. During fundamental economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty. During economic bubbles, return predictability and its uncertainty have been smaller than normal times.

Keywords: Economic bubbles, Fundamental crises, Financial crises, Market

JEL Classification: G12, G14, G15

Suggested Citation

Kim, Jae H. and Lim, Kian-Ping and Shamsuddin, Abul, Stock Return Predictability and the Adaptive Markets Hypothesis: Evidence from Century Long U.S. Data (January 24, 2010). Finance and Corporate Governance Conference 2010 Paper, Available at SSRN: https://ssrn.com/abstract=1541639 or http://dx.doi.org/10.2139/ssrn.1541639

Jae H. Kim

La Trobe University - School of Economics and Finance ( email )

Department of Finance
La Trobe Business School
Bundoora, IN 3086
Australia

Kian-Ping Lim

Universiti Malaya ( email )

Department of Economics
Faculty of Economics and Administration
Kuala Lumpur, 50603
Malaysia

Abul Shamsuddin (Contact Author)

University of Newcastle (Australia) - Newcastle Business School ( email )

City Campus East – 231
Callaghan, NSW 2308
Australia

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