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U.K. Stock Returns: Predictability and Business Conditions

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  • Black, Angela
  • Fraser, Patricia

Abstract

This paper examines the hypothesis that predictable variation in excess returns can be explained by future business conditions. Using GARCH-M methodology and data on U.K. share returns over the period 1965-92, the authors find that excess returns are able to capture expectations regarding the future state of the economy. Futher, 'news' on future business conditions in the economy would appear to be related to the observed persistence in the conditional variance of excess returns. Copyright 1995 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Black, Angela & Fraser, Patricia, 1995. "U.K. Stock Returns: Predictability and Business Conditions," The Manchester School of Economic & Social Studies, University of Manchester, vol. 63(0), pages 85-102, Suppl..
    • Handle: RePEc:bla:manch2:v:63:y:1995:i:0:p:85-102
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    Citations

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    Cited by:

    1. Patricia Fraser & Andrew McKaig, 2001. "Basis variation and a common source of risk: evidence from UK futures markets," The European Journal of Finance, Taylor & Francis Journals, vol. 7(1), pages 39-62.
    2. Joelle Miffre, 2000. "The Abnormal Performance of Bond Returns," ICMA Centre Discussion Papers in Finance icma-dp2000-03, Henley Business School, University of Reading.
    3. Pesaran, Mohammad Hashem, 2005. "Market efficiency today," CFS Working Paper Series 2006/01, Center for Financial Studies (CFS).
    4. Carolina Fugazza & Massimo Guidolin & Giovanna Nicodano, 2007. "Investing for the Long-run in European Real Estate," The Journal of Real Estate Finance and Economics, Springer, vol. 34(1), pages 35-80, January.
    5. Pesaran, M. Hashem, 2010. "Predictability of Asset Returns and the Efficient Market Hypothesis," IZA Discussion Papers 5037, Institute of Labor Economics (IZA).
    6. Angelos Kanas, 2009. "The relation between the equity risk premium and the bond maturity premium in the UK: 1900–2006," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 33(2), pages 111-127, April.
    7. Nektarios Aslanidis, 2002. "Smooth Transition Regression Models in UK Stock Returns," Working Papers 0201, University of Crete, Department of Economics.
    8. Stilianos Fountas & Menelaos Karanasos & Marika Karanassou, "undated". "A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback," Discussion Papers 00/24, Department of Economics, University of York.
    9. David Lovatt & Ashok Parikh, 2000. "Stock returns and economic activity: the UK case," The European Journal of Finance, Taylor & Francis Journals, vol. 6(3), pages 280-297.
    10. N. Groenewold, 2000. "The Sensitivity of Tests of Asset Pricing Models to the IID-normal Assumptions: Contemporaneous evidence from the US and UK stock markets," Economics Discussion / Working Papers 00-06, The University of Western Australia, Department of Economics.
    11. Ziliotto, Arianna & Serati, Massimiliano, 2015. "The semi-strong efficiency debate: In search of a new testing framework," Research in International Business and Finance, Elsevier, vol. 34(C), pages 412-438.
    12. Massimo Guidolin & Stuart Hyde & David McMillan & Sadayuki Ono, 2014. "Does the Macroeconomy Predict UK Asset Returns in a Nonlinear Fashion? Comprehensive Out-of-Sample Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(4), pages 510-535, August.
    13. Aityan, Sergey K. & Ivanov-Schitz, Alexey K. & Izotov, Sergey S., 2010. "Time-shift asymmetric correlation analysis of global stock markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 20(5), pages 590-605, December.
    14. Stilianos Fountas & Menelaos Karanasos & Marika Karanassou, "undated". "A GARCH Model of Inflation and Inflation Uncertainty with Simultaneous Feedback," Discussion Papers 00/24, Department of Economics, University of York.
    15. Miffre, Joelle, 2001. "Economic activity and time variation in expected futures returns," Economics Letters, Elsevier, vol. 73(1), pages 73-79, October.
    16. Menelaos Karanasos & J. Kim, "undated". "Alternative GARCH in Mean Models: An Application to the Korean Stock Market," Discussion Papers 00/25, Department of Economics, University of York.
    17. Granger, C.W.J. & Pesaran, M. H., 1999. "Economic and Statistical Measures of Forecast Accuracy," Cambridge Working Papers in Economics 9910, Faculty of Economics, University of Cambridge.
    18. Neil Kellard & John Nankervis & Fotis Papadimitriou, 2007. "Predicting the UK Equity Premium with Dividend Ratios: An Out-Of-Sample Recursive Residuals Graphical Approach," Money Macro and Finance (MMF) Research Group Conference 2006 129, Money Macro and Finance Research Group.
    19. Michael Andersen & Robert Subbaraman, 1996. "Share Prices and Investment," RBA Research Discussion Papers rdp9610, Reserve Bank of Australia.
    20. Yao, Juan & Alles, Lakshman, 2006. "Industry return predictability, timing and profitability," Journal of Multinational Financial Management, Elsevier, vol. 16(2), pages 122-141, April.

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