- Title
- Equity return predictability, its determinants, and profitable trading strategies
- Creator
- Rahman, Md Lutfur; Khan, Mahbub; Vigne, Samuel A.; Uddin, Gazi Salah
- Relation
- Journal of Forecasting Vol. 40, Issue 1, p. 162-186
- Publisher Link
- http://dx.doi.org/10.1002/for.2712
- Publisher
- John Wiley & Sons
- Resource Type
- journal article
- Date
- 2021
- Description
- This paper explains cross-market variations in the degree of return predictability using the extreme bounds analysis (EBA). The EBA addresses model uncertainty in identifying robust determinant(s) of cross-sectional return predictability. Additionally, the paper develops two profitable trading strategies based on return predictability evidence. The result reveals that among the 13 determinants of the cross-sectional variation of return predictability, only value of stock traded (a measure of liquidity) is found to have robust explanatory power by Leamer's (1985) EBA. However, Sala-i-Martin's (1997) EBA reports that value of stock traded, gross domestic product (GDP) per capita, level of information and communication technology (ICT) development, governance quality, and corruption perception are robust determinants. We further find that a strategy of buying (selling) aggregate market portfolios of the countries with the highest positive (negative) return predictability statistic in the past 24 months generates statistically significant positive returns in the subsequent 3 to 12 months. In the individual country level, a trading rule of buying (selling) the respective country's aggregate market portfolio, when the return predictability statistic turns out positive (negative), outperforms the conventional buy-and-hold strategy for many countries.
- Subject
- extreme bounds analysis; fifty equity markets; return predictability; trading strategies; SDG 16; Sustainable Development Goals
- Identifier
- http://hdl.handle.net/1959.13/1462012
- Identifier
- uon:46363
- Identifier
- ISSN:0277-6693
- Rights
- This is the peer reviewed version of the following article: Rahman, Md Lutfur; Khan, Mahbub; Vigne, Samuel A.; Uddin, Gazi Salah. “Equity return predictability, its determinants, and profitable trading strategies”. Journal of Forecasting Vol. 40, Issue 1, p. 162-186 (2021), which has been published in final form at http://dx.doi.org/10.1002/for.2712. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
- Language
- eng
- Full Text
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