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A bootstrap test for predictability of asset returns

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  • Kim, Jae H.
  • Shamsuddin, Abul

Abstract

A bootstrap test is proposed for predictability of asset returns. The bootstrap is conducted with the likelihood ratio test in a restricted VAR form. The test shows no size distortion in small samples with desirable power properties. A wild bootstrap version, valid for financial returns showing unknown forms of conditional heteroskedasticty, is also proposed. As an application, predictive powers of dividend-price ratio and interest rate for U.S stock returns are evaluated.

Suggested Citation

  • Kim, Jae H. & Shamsuddin, Abul, 2020. "A bootstrap test for predictability of asset returns," Finance Research Letters, Elsevier, vol. 35(C).
    • Handle: RePEc:eee:finlet:v:35:y:2020:i:c:s1544612319305847
    DOI: 10.1016/j.frl.2019.09.004
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    References listed on IDEAS

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    Cited by:

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    2. Oktay Ozkan, 2020. "Time-varying return predictability and adaptive markets hypothesis: Evidence on MIST countries from a novel wild bootstrap likelihood ratio approach," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 34(2), pages 101-113.
    3. Erik Hjalmarsson & Tamas Kiss, 2022. "Long‐run predictability tests are even worse than you thought," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(7), pages 1334-1355, November.
    4. Godwin Olasehinde-Williams & Oktay Özkan, 2022. "Is interest rate uncertainty a predictor of investment volatility? evidence from the wild bootstrap likelihood ratio approach," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 46(3), pages 507-521, July.

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    More about this item

    Keywords

    GLS estimation; Predictive regression; Power analysis; Restricted VAR; Wild bootstrapping;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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