Stock Market Return Predictability Before and After the Dodd-Frank Act

29 Pages Posted: 30 Jun 2020

See all articles by Isabel Casas

Isabel Casas

University of Southern Denmark

Xiuping Mao

Zhongnan University of Economics and Law - School of Finance

Helena Veiga

Universidad Carlos III de Madrid - Department of Statistics and Econometrics

Date Written: Feb 5, 2020

Abstract

We analyze the stock market return predictability for three different periods. We evaluate the conditional variance (CV) and the variance risk premium (VRP) as predictors of stock market returns for which we are using well-established versions of the heterogeneous auto-regressive (HAR) model and propose two new semi-parametric extensions. Results show that the CV and VRP are predictors of future stock market returns in the period before the global financial crisis (GFC). However, these variables lose predictive power after the Dodd-Frank Act (DFA) and change sign, indicating that investors are willing to pay a risk premium for "good uncertainty".

Keywords: Dodd-Frank Act; Non-Parametric Methods; Predictability; Realized Variance; Variance Risk Premium

JEL Classification: C22; C51; C52; C53; G1; G32

Suggested Citation

Casas, Isabel and Mao, Xiuping and Veiga, Helena, Stock Market Return Predictability Before and After the Dodd-Frank Act (Feb 5, 2020). Available at SSRN: https://ssrn.com/abstract=3620062 or http://dx.doi.org/10.2139/ssrn.3620062

Isabel Casas (Contact Author)

University of Southern Denmark ( email )

Campusvej 55
DK-5230 Odense, 5000
Denmark

Xiuping Mao

Zhongnan University of Economics and Law - School of Finance ( email )

WenQuan Building, 182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

Helena Veiga

Universidad Carlos III de Madrid - Department of Statistics and Econometrics ( email )

c/ Madrid 126
Getafe (Madrid), 28903
Spain

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