Forecasting Profitablility and Earnings: A Study of the UK Stock Market (1982-2000)
23 Pages Posted: 8 Jun 2002
Date Written: March 2002
In this paper we apply an approach recently developed by Fama and French (2000) to study whether UK company profitability is mean-reverting. We use a sample of roughly 987 firms per year for a period from 1982-2000, drawn from Datastream. In a simple partial adjustment model we find convergence towards the mean at a rate of about 25% per year. Our results are very similar in direction to those of Fama and French (2000) but our results do not display significant non-linearities. The change in profitability appears to be more strongly influenced by dividends in the UK.
Keywords: Excess Volatility, Variance Bound Tests, Mutual Funds, Investment Trusts, Net Asset Value
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