Stock return predictability and the adaptive markets hypothesis: Evidence from century-long U.S. data |
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Authors: | Jae H Kim Abul ShamsuddinKian-Ping Lim |
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Institution: | a School of Economics and Finance, La Trobe University, VIC 3086, Australiab Newcastle Business School, The University of Newcastle, Callaghan, NSW 2308, Australiac Labuan School of International Business & Finance, Universiti Malaysia Sabah, Malaysia |
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Abstract: | This paper provides strong evidence of time-varying return predictability of the Dow Jones Industrial Average index from 1900 to 2009. Return predictability is found to be driven by changing market conditions, consistent with the implication of the adaptive markets hypothesis. During market crashes, no statistically significant return predictability is observed, but return predictability is associated with a high degree of uncertainty. In times of economic or political crises, stock returns have been highly predictable with a moderate degree of uncertainty in predictability. We find that return predictability has been smaller during economic bubbles than in normal times. We also find evidence that return predictability is associated with stock market volatility and economic fundamentals. |
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Keywords: | G14 |
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