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- Title
A STATE-SPACE MODEL OF SHORT- AND LONG-HORIZON STOCK RETURNS.
- Authors
Chunsheng Zhou; Chang Qing
- Abstract
In this article we propose a new parsimonious state-space model in which state variables characterize the stochastic movements of stock returns. Using the equally weighted and dec lie monthly stock returns, we show that (a) a parsimonious state-space model characterizes the variation in expected returns at any horizon; (b) the extracted expected returns explain a substantial proportion of the variance in realized returns, and the magnitude of this proportion increases significantly with the horizon of returns; (c) the model successfully captures the empirical fact that returns of smaller firms have both stronger positive autocorrelations of short-horizon returns and stronger negative autocorrelations of long-horizon returns; and (d) the forecasts of asset returns obtained with the state-pace model subsume the information in other potential predictor variables such as dividend yields.
- Subjects
RATE of return; STOCKS (Finance); MATHEMATICAL models; EXPECTED returns; EARNINGS per share; PRICE-earnings ratio
- Publication
Journal of Financial Research, 2000, Vol 23, Issue 4, p523
- ISSN
0270-2592
- Publication type
Article
- DOI
10.1111/j.1475-6803.2000.tb00758.x