A random coefficient approach to the predictability of stock returns in panels

Westerlund, Joakim and Narayan, Paresh 2015, A random coefficient approach to the predictability of stock returns in panels, Journal of financial econometrics, vol. 13, no. 3, pp. 605-664.

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Title A random coefficient approach to the predictability of stock returns in panels
Author(s) Westerlund, JoakimORCID iD for Westerlund, Joakim orcid.org/0000-0002-8030-5706
Narayan, PareshORCID iD for Narayan, Paresh orcid.org/0000-0001-7934-8146
Journal name Journal of financial econometrics
Volume number 13
Issue number 3
Start page 605
End page 664
Total pages 60
Publisher Oxford University Press
Place of publication Oxford, Eng.
Publication date 2015-01-01
ISSN 1479-8409
Keyword(s) Social Sciences
Business, Finance
Business & Economics
panel data
predictive regression
stock return predictability
Summary © The Author, 2014. 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 unit-by-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 study 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-to-price the variance of the slopes is positive, which we take as evidence of predictability.
Language eng
Field of Research 140304 Panel Data Analysis
1403 Econometrics
1502 Banking, Finance And Investment
Socio Economic Objective 970115 Expanding Knowledge in Commerce
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Persistent URL http://hdl.handle.net/10536/DRO/DU:30081168

Document type: Journal Article
Collections: Faculty of Business and Law
School of Accounting, Economics and Finance
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