Predictability and volatility of stock returns

This article examines predictability of returns and volatily in three major stock markets, the U.S., U.K., and Japan, using the Vector Autoregrassive and the Autoregressive Conditional Heteroskedastic (ARCH) approaches. We find that in all three markets dividendprice ratios and/or dividend growth rates predict returns. Moreover, there is persistence in the variance of stock returns attribute to the innovations related to the same variables.

[1]  R. Engle.  Autoregressive conditional heteroscedasticity with estimates of the variance of United Kingdom inflation , 1982 .

[2]  W. D. Lastrapes,et al.  Exchange Rate Volatility and U.S. Monetary Policy: An ARCH Application , 1989 .

[3]  Douglas M. Patterson,et al.  A DIAGNOSTIC TEST FOR NONLINEAR SERIAL DEPENDENCE IN TIME SERIES FITTING ERRORS , 1986 .

[4]  Clive W. J. Granger,et al.  Developments in the Nonlinear Analysis of Economic Series , 1991 .

[5]  Campbell R. Harvey,et al.  Volatility in the Foreign Currency Futures Market , 1991 .

[6]  T. Bollerslev,et al.  Generalized autoregressive conditional heteroskedasticity , 1986 .

[7]  Tim Bollerslev,et al.  Chapter 49 Arch models , 1994 .

[8]  David A. Hsieh,et al.  Modeling Heteroscedasticity in Daily Foreign-Exchange Rates , 1989 .

[9]  Anil K. Bera,et al.  ARCH Models: Properties, Estimation and Testing , 1993 .

[10]  John Y. Campbell,et al.  What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns , 1991 .

[11]  R. Chou,et al.  ARCH modeling in finance: A review of the theory and empirical evidence , 1992 .

[12]  V. Akgiray.  Conditional Heteroscedasticity in Time Series of Stock Returns: Evidence and Forecasts , 1989 .

[13]  Jeff Fleming,et al.  Information and volatility linkages in the stock, bond, and money markets 1 1 This paper was previou , 1998 .

[14]  Robert F. Engle,et al.  Common Volatility in International Equity Markets , 1993 .

[15]  Wen-Ling Lin.  Impulse Response Function for Conditional Volatility in Garch Models , 1994 .

[16]  C. Sims.  MACROECONOMICS AND REALITY , 1977 .

[17]  M. Hinich.  Testing for Gaussianity and Linearity of a Stationary Time Series. , 1982 .

[18]  Eric Ghysels,et al.  Periodic Autoregressive Conditional Heteroskedasticity , 1996 .

[19]  Anil K. Bera,et al.  ARCH and Bilinearity as Competing Models for Nonlinear Dependence , 1997 .

[20]  M. Dacorogna,et al.  A geographical model for the daily and weekly seasonal volatility in the foreign exchange market , 1993 .

[21]  G. Andrew Karolyi,et al.  A Multivariate GARCH Model of International Transmissions of Stock Returns and Volatility: The Case of the United States and Canada , 1995 .

[22]  R. Engle,et al.  Semiparametric ARCH Models , 1991 .

[23]  R. Engle,et al.  Implied ARCH models from options prices , 1992 .

[24]  Patrick L. Brockett,et al.  Bispectral-Based Tests for the Detection of Gaussianity and Linearity in Time Series , 1988 .

[25]  Michael J. Dueker.  Markov Switching in GARCH Processes and Mean-Reverting Stock-Market Volatility , 1997 .

[26]  St. Pierre,et al.  The impact of option introduction on the conditional return distribution of underlying securities , 1998 .