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Common nonlinearities in long-horizon stock returns: Evidence from the G-7 stock markets

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  • Kim, Sei-Wan
  • Mollick, André V.
  • Nam, Kiseok

Abstract

Employing annual returns generated from overlapping monthly price indexes for the G-7 stock markets, this paper examines asymmetry and common nonlinearities in long-horizon stock returns. Identifying widespread nonlinearities based on LSTAR or ESTAR models, we find that the asymmetric nonlinear dynamics induces a substantial portion of predictable variations in long-horizon stock returns. The nonlinear models clearly outperform linear models "in sample" and in most of the out of sample forecasting exercises. With nonlinear impulse responses suggesting strong stability of return dynamics, the empirical results of this paper provide useful information in developing annual investment strategies for international stock markets.

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  • Kim, Sei-Wan & Mollick, André V. & Nam, Kiseok, 2008. "Common nonlinearities in long-horizon stock returns: Evidence from the G-7 stock markets," Global Finance Journal, Elsevier, vol. 19(1), pages 19-31.
    • Handle: RePEc:eee:glofin:v:19:y:2008:i:1:p:19-31
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    3. Sei-Wan Kim & Moon Jung Choi, 2016. "Does Intra-Regional Trade Matter in Regional Stock Markets?: New Evidence from Asia-Pacific Region," Working Papers 2016-11, Economic Research Institute, Bank of Korea.
    4. Fuzuli Aliyev, 2019. "Testing Market Efficiency with Nonlinear Methods: Evidence from Borsa Istanbul," IJFS, MDPI, vol. 7(2), pages 1-11, June.
    5. Yu-Hau Hu & Shun-Jen Hsueh, 2013. "A Study of yhe Nonlinear Relationships among the U.S. and Asian Stock Markets during Financial Crises," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 134-147, December.
    6. Barry Harrison & Winston Moore, 2011. "Nonlinearities in central and eastern European stock markets," Applied Economics Letters, Taylor & Francis Journals, vol. 18(14), pages 1363-1366.
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    8. Barry Harrison & Winston Moore, 2012. "Stock Market Efficiency, Non-Linearity, Thin Trading and Asymmetric Information in MENA Stock Markets," Economic Issues Journal Articles, Economic Issues, vol. 17(1), pages 77-93, March.
    9. Gozbasi, Onur & Kucukkaplan, Ilhan & Nazlioglu, Saban, 2014. "Re-examining the Turkish stock market efficiency: Evidence from nonlinear unit root tests," Economic Modelling, Elsevier, vol. 38(C), pages 381-384.

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