Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/130030
Authors: 
Hong, Seok Young
Linton, Oliver
Zhang, Hui Jun
Year of Publication: 
2015
Series/Report no.: 
cemmap working paper, Centre for Microdata Methods and Practice CWP13/15
Abstract: 
We propose several multivariate variance ratio statistics. We derive the asymptotic distribution of the statistics and scalar functions thereof under the null hypothesis that returns are unpredictable after a constant mean adjustment (i.e., under the weak form Efficient Market Hypothesis). We do not impose the no leverage assumption of Lo and MacKinlay (1988) but our asymptotic standard errors are relatively simple and in particular do not require the selection of a bandwidth parameter. We extend the framework to allow for a time varying risk premium through common systematic factors. We show the limiting behaviour of the statistic under a multivariate fads model and under a moderately explosive bubble process: these alternative hypotheses give opposite predictions with regards to the long run value of the statistics. We apply the methodology to five weekly size-sorted CRSP portfolio returns from 1962 to 2013 in three subperiods. We find evidence of a reduction of linear predictability in the most recent period, for small and medium cap stocks. The main findings are not substantially affected by allowing for a common factor time varying risk premium.
Subjects: 
Bubbles
Fads
Martingale
Momentum
Predictability
JEL: 
C10
C32
G10
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size
723.37 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.