An Analysis of the Predictability of Asset Returns: A Case of Six Emerging Stock Markets of Asia

Abstract

The aim of this paper is to investigate the predictability of stock returns. The Efficient Market Hypothesis or Random Walk is rejected and an Alternative Parametric Model (ARIMA) is proposed for modeling and forecasting stock returns. The results of the variance ratio test of Lo and MacKinlay (1988) is applied, using weekly data on the Korea, Hong Kong, Taiwan, Indonesia and Singapore indices for the period 1997:1 to 2008:04. The results indicate that Hong Kong, Indonesia and Singapore stock returns contain predictable components. We also consider forecasting the volatility of returns using GARCH model with t-distributed innovations. This study allows for explicit modeling of the ‘fat tails’ usually observed in the stock return distributions.