The Predictability of Stock Returns: A Cross-Sectional Simulation

Posted: 10 Oct 1998

See all articles by Zsuzsanna Fluck

Zsuzsanna Fluck

Michigan State University - Department of Finance

Burton G. Malkiel

Princeton University - Bendheim Center for Finance; National Bureau of Economic Research (NBER)

Richard Quandt

Princeton University; Andrew W. Mellon Foundation

Abstract

This paper investigates whether predictable patterns that previous empirical work in finance have isolated appear to be persistent and exploitable by portfolio managers. On a sample that is free from survivorship bias we construct a test wherein we simulate the purchases and sales an investor would undertake to exploit the predictable patterns, charging the appropriate transaction costs for buying and selling and using only publicly available information at the time of decisionmaking. We restrict investment to large companies only to assure that the full cost of transactions is properly accounted for. We confirmed on our sample that contrarian strategies yield sizable excess returns after adjusting for risk, as measured by beta. Using analysts' estimates of long term growth we construct a test of the Lakonishok, Shleifer and Vishny (1994) hypothesis. We reach the conclusion that, contrary to Lakonishok et al. (1994), the superior performance of contrarian strategies can not be explained by the superior performance of stocks with low estimated growth rates.

JEL Classification: G12, G14

Suggested Citation

Fluck, Zsuzsanna and Malkiel, Burton G. and Quandt, Richard E., The Predictability of Stock Returns: A Cross-Sectional Simulation. Available at SSRN: https://ssrn.com/abstract=6451

Zsuzsanna Fluck (Contact Author)

Michigan State University - Department of Finance ( email )

Eli Broad Graduate School of Management
315 Eppley Center
East Lansing, MI 48824-1122
United States
517-353-3019 (Phone)
517-432-1080 (Fax)

Burton G. Malkiel

Princeton University - Bendheim Center for Finance ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States
609-258-6445 (Phone)
609-258-0771 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Richard E. Quandt

Princeton University ( email )

22 Chambers Street
Princeton, NJ 08544-0708
United States

Andrew W. Mellon Foundation

140 East 62nd Street
New York, NY 10021
United States

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