Predictability of Stock Returns: Robustness and Economic Significance

JOURNAL OF FINANCE, Vol. 50 No. 4, September 1995

Posted: 24 Aug 1998

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Abstract

This paper examines the robustness of the evidence on predictability of US stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy-and-hold strategy in the market index. We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns. The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960's, but increased to a level where, net of transaction costs, it could have been exploited by investors in the volatile markets of the 1970's.

JEL Classification: G14

Suggested Citation

Pesaran, M. Hashem and Timmermann, Allan, Predictability of Stock Returns: Robustness and Economic Significance. JOURNAL OF FINANCE, Vol. 50 No. 4, September 1995, Available at SSRN: https://ssrn.com/abstract=6720

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

Allan Timmermann

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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