This dissertation collects two papers regarding the econometric and economic theory
and testing of the predictability of asset returns. It is widely accepted that stock
returns are not only predictable but highly so. This belief is due to an abundance
of existing empirical literature fi nding often overwhelming evidence in favor of predictability.
The common regressors used to test predictability (e.g., the dividend-price
ratio for stock returns) are very persistent and their innovations are highly correlated
with returns. Persistence when combined with a correlation between innovations in
the regressor and asset returns can cause substantial over-rejection of a true null hypothesis.
This result is both well documented and well known. On the other hand,
stochastic volatility is both broadly accepted as a part of return time series and largely
ignored by the existing econometric literature on the predictability of returns. The
severe e ffect that stochastic volatility can have on standard tests are demonstrated
here. These deleterious e ffects render standard tests invalid. However, this problem
can be easily corrected using a simple change of chronometer. When a return time
series is read in the usual way, at regular intervals of time (e.g., daily observations),
then the distribution of returns is highly non-normal and displays marked time heterogeneity.
If the return time series is, instead, read according to a clock based on
regular intervals of volatility, then returns will be independent and identically normally
distributed. This powerful result is utilized in a unique way in each chapter of
this dissertation. This time-deformation technique is combined with the Cauchy t-test and the newly introduced martingale estimation technique. This dissertation nds no
evidence of predictability in stock returns. Moreover, using martingale estimation,
the cause of the Forward Premium Anomaly may be more easily discerned.
| Identifer | oai:union.ndltd.org:tamu.edu/oai:repository.tamu.edu:1969.1/ETD-TAMU-2009-08-859 |
| Date | 2009 August 1900 |
| Creators | Jacewitz, Stefan A. |
| Contributors | Park, Joon Y. |
| Source Sets | Texas A and M University |
| Language | en_US |
| Detected Language | English |
| Type | Book, Thesis, Electronic Dissertation, text |
| Format | application/pdf |
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