IDEAS home Printed from https://ideas.repec.org/p/dkn/ecomet/fe_2014_10.html
   My bibliography  Save this paper

A random coefficient approach to the predictability of stock returns in panels

Author

Listed:
  • Westerlund, Joakim
  • Narayan, Paresh

Abstract

Most studies of the predictability of returns are based on time series data, and whenever panel data are used, the testing is almost always conducted in an unrestricted unit-by-unit fashion, which makes for a very heavy parametrization of the model. On the other hand, the few panel tests that exist are too restrictive in the sense that they are based on homogeneity assumptions that might not be true. As a response to this, the current study proposes new predictability tests in the context of a random coefficient panel data model, in which the null of no predictability corresponds to the joint restriction that the predictive slope has zero mean and variance. The tests are applied to a large panel of stocks listed at the New York Stock Exchange. The results suggest that while the predictive slopes tend to average to zero, in case of book-to-market and cash flow-to-price the variance of the slopes is positive, which we take as evidence of predictability.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Westerlund, Joakim & Narayan, Paresh, 2014. "A random coefficient approach to the predictability of stock returns in panels," Working Papers fe_2014_10, Deakin University, Department of Economics.
    • Handle: RePEc:dkn:ecomet:fe_2014_10
    DOI: 10.1093/jjfinec/nbu003
    as

    Download full text from publisher

    File URL: http://doi.org/10.1093/jjfinec/nbu003
    Download Restriction: no
    File URL: https://libkey.io/10.1093/jjfinec/nbu003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Gerard Hoberg & Gordon Phillips, 2010. "Real and Financial Industry Booms and Busts," Journal of Finance, American Finance Association, vol. 65(1), pages 45-86, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bazdresch, Santiago, 2011. "Product differentiation and systematic risk: theory and empirical evidence," MPRA Paper 35504, University Library of Munich, Germany, revised 01 Nov 2011.
    2. Bustamante, Maria Cecilia, 2011. "Strategic investment, industry concentration and the cross section of returns," LSE Research Online Documents on Economics 37454, London School of Economics and Political Science, LSE Library.
    3. Wang, Tracy Yue & Winton, Andrew, 2021. "Industry informational interactions and corporate fraud," Journal of Corporate Finance, Elsevier, vol. 69(C).
    4. Gyimah, Daniel & Siganos, Antonios & Veld, Chris, 2021. "Effects of financial constraints and product market competition on share repurchases," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    5. Liu, Sibo & Wu, Dejun, 2016. "Competing by conducting good deeds: The peer effect of corporate social responsibility," Finance Research Letters, Elsevier, vol. 16(C), pages 47-54.
    6. Katarzyna Platt, 2020. "Corporate Bonds And Product Market Competition," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 615-647, August.
    7. Almaghrabi, Khadija S., 2023. "Local product market competition and investment home bias," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 88(C).
    8. Kryzanowski, Lawrence & Mohsni, Sana, 2015. "Earnings forecasts and idiosyncratic volatilities," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 107-123.
    9. Makridis, Christos A. & McGuire, Erin, 2023. "The quality of innovation “Booms” during “Busts”," Research Policy, Elsevier, vol. 52(1).
    10. Bhargava, Rahul & Faircloth, Sheri & Zeng, Hongchao, 2017. "Takeover protection and stock price crash risk: Evidence from state antitakeover laws," Journal of Business Research, Elsevier, vol. 70(C), pages 177-184.
    11. Xiang, Junyi & Zhang, Hongxiang & Dang, Dingyu & Guan, Jing, 2023. "Involuntary political connections and private firms' tax avoidance," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    12. Benhima, Kenza, 2019. "Booms and busts with dispersed information," Journal of Monetary Economics, Elsevier, vol. 107(C), pages 32-47.
    13. Adra, Samer & Gao, Yang & Huang, Jin & Yuan, Jiayi, 2023. "Geopolitical risk and corporate payout policy," International Review of Financial Analysis, Elsevier, vol. 87(C).
    14. Guernsey, Scott & Sepe, Simone M. & Serfling, Matthew, 2022. "Blood in the water: The value of antitakeover provisions during market shocks," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1070-1096.
    15. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    16. Zhiguo He & Péter Kondor, 2016. "Inefficient Investment Waves," Econometrica, Econometric Society, vol. 84, pages 735-780, March.
    17. Garcia-Appendini, Emilia, 2014. "Idiosyncratic Shocks and Industry Contagion: Evidence from a Quasi-experiment," Working Papers on Finance 1410, University of St. Gallen, School of Finance, revised Mar 2015.
    18. Campello, Murillo & Gao, Janet, 2017. "Customer concentration and loan contract terms," Journal of Financial Economics, Elsevier, vol. 123(1), pages 108-136.
    19. Shang, Longfei & Lin, Ji-Chai & Saffar, Walid, 2021. "Does economic policy uncertainty drive the initiation of corporate lobbying?," Journal of Corporate Finance, Elsevier, vol. 70(C).
    20. Chang, Liang & Tan, Na & Zhang, Xinyue & Yuan, Yiyun, 2023. "Does peer firms’ tone affect corporate investment? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 90(C).

    More about this item

    Keywords

    Panel data; Predictive regression; Stock return predictability;
    All these keywords.

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:dkn:ecomet:fe_2014_10. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Xueli Tang (email available below). General contact details of provider: https://edirc.repec.org/data/sedeaau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.