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A Random Coefficient Approach to the Predictability of Stock Returns in Panels

Westerlund, Joakim LU and Narayan, Paresh (2014) In Journal of Financial Econometrics
Abstract
Most studies of the predictability of returns are based on time series data, and whenever

panel data are used, the testing is almost always conducted in an unrestricted unitby-

unit fashion, which makes for a very heavy parametrization of the model. On the

other hand, the few panel tests that exist are too restrictive in the sense that they are

based on homogeneity assumptions that might not be true. As a response to this, the

current paper proposes new predictability tests in the context of a random coefficient

panel data model, in which the null of no predictability corresponds to the joint restriction

that the predictive slope has zero mean and variance. The tests are... (More)
Most studies of the predictability of returns are based on time series data, and whenever

panel data are used, the testing is almost always conducted in an unrestricted unitby-

unit fashion, which makes for a very heavy parametrization of the model. On the

other hand, the few panel tests that exist are too restrictive in the sense that they are

based on homogeneity assumptions that might not be true. As a response to this, the

current paper proposes new predictability tests in the context of a random coefficient

panel data model, in which the null of no predictability corresponds to the joint restriction

that the predictive slope has zero mean and variance. The tests are applied to a large

panel of stocks listed at the New York Stock Exchange. The results suggest that while

the predictive slopes tend to average to zero, in case of book-to-market and cash flow-toprice

the variance of the slopes is positive, which we take as evidence of predictability (Less)
Please use this url to cite or link to this publication:
author
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Panel data, Predictive regression, Stock return predictability
in
Journal of Financial Econometrics
publisher
Oxford University Press
external identifiers
  • scopus:84925282417
ISSN
1479-8409
DOI
10.1093/jjfinec/nbu003
language
English
LU publication?
no
id
b54530df-962b-4b77-b978-ec9f781ce02f (old id 4588908)
date added to LUP
2014-08-20 11:20:33
date last changed
2017-11-12 03:13:43
@article{b54530df-962b-4b77-b978-ec9f781ce02f,
  abstract     = {Most studies of the predictability of returns are based on time series data, and whenever<br/><br>
panel data are used, the testing is almost always conducted in an unrestricted unitby-<br/><br>
unit fashion, which makes for a very heavy parametrization of the model. On the<br/><br>
other hand, the few panel tests that exist are too restrictive in the sense that they are<br/><br>
based on homogeneity assumptions that might not be true. As a response to this, the<br/><br>
current paper proposes new predictability tests in the context of a random coefficient<br/><br>
panel data model, in which the null of no predictability corresponds to the joint restriction<br/><br>
that the predictive slope has zero mean and variance. The tests are applied to a large<br/><br>
panel of stocks listed at the New York Stock Exchange. The results suggest that while<br/><br>
the predictive slopes tend to average to zero, in case of book-to-market and cash flow-toprice<br/><br>
the variance of the slopes is positive, which we take as evidence of predictability},
  author       = {Westerlund, Joakim and Narayan, Paresh},
  issn         = {1479-8409},
  keyword      = {Panel data,Predictive regression,Stock return predictability},
  language     = {eng},
  month        = {02},
  publisher    = {Oxford University Press},
  series       = {Journal of Financial Econometrics},
  title        = {A Random Coefficient Approach to the Predictability of Stock Returns in Panels},
  url          = {http://dx.doi.org/10.1093/jjfinec/nbu003},
  year         = {2014},
}