The Journal of Finance

Predictability of Stock Returns: Robustness and Economic Significance

Published: 9/1995,  Volume: 50,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1995.tb04055.x  |  Cited by: 760

M. HASHEM PESARAN, ALLAN TIMMERMANN

This article examines the robustness of the evidence on predictability of U.S. stock returns, and addresses the issue of whether this predictability could have been historically exploited by investors to earn profits in excess of a buy‐and‐hold strategy in the market index. We find that the predictive power of various economic factors over stock returns changes through time and tends to vary with the volatility of returns. The degree to which stock returns were predictable seemed quite low during the relatively calm markets in the 1960s, but increased to a level where, net of transaction costs, it could have been exploited by investors in the volatile markets of the 1970s.

Firm Size and Cyclical Variations in Stock Returns

Published: 6/2000,  Volume: 55,  Issue: 3  |  DOI: 10.1111/0022-1082.00246  |  Cited by: 456

Gabriel Perez‐Quiros, Allan Timmermann

Recent imperfect capital market theories predict the presence of asymmetries in the variation of small and large firms' risk over the economic cycle. Small firms with little collateral should be more strongly affected by tighter credit market conditions in a recession state than large, better collateralized ones. This paper adopts a flexible econometric model to analyze these mplications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states, which translates into a higher sensitivity of their expected stock returns with respect to variables that measure credit market conditions.

Cash Flow News and Stock Price Dynamics

Published: 6/4/2020,  Volume: 75,  Issue: 4  |  DOI: 10.1111/jofi.12901  |  Cited by: 38

DAVIDE PETTENUZZO, RICCARDO SABBATUCCI, ALLAN TIMMERMANN

We develop a new approach to modeling dynamics in cash flows extracted from daily firm‐level dividend announcements. We decompose daily cash flow news into a persistent component, jumps, and temporary shocks. Empirically, we find that the persistent cash flow component is a highly significant predictor of future growth in dividends and consumption. Using a log‐linearized present value model, we show that news about the persistent dividend growth component predicts stock returns consistent with asset pricing constraints implied by this model. News about the daily dividend growth process also helps explain concurrent return volatility and the probability of jumps in stock returns.

Data‐Snooping, Technical Trading Rule Performance, and the Bootstrap

Published: 10/1999,  Volume: 54,  Issue: 5  |  DOI: 10.1111/0022-1082.00163  |  Cited by: 726

Ryan Sullivan, Allan Timmermann, Halbert White

In this paper we utilize White's Reality Check bootstrap methodology (White (1999)) to evaluate simple technical trading rules while quantifying the data‐snooping bias and fully adjusting for its effect in the context of the full universe from which the trading rules were drawn. Hence, for the first time, the paper presents a comprehensive test of performance across all technical trading rules examined. We consider the study of Brock, Lakonishok, and LeBaron (1992), expand their universe of 26 trading rules, apply the rules to 100 years of daily data on the Dow Jones Industrial Average, and determine the effects of data‐snooping.

Pockets of Predictability

Published: 5/9/2023,  Volume: 78,  Issue: 3  |  DOI: 10.1111/jofi.13229  |  Cited by: 84

LELAND E. FARMER, LAWRENCE SCHMIDT, ALLAN TIMMERMANN

For many benchmark predictor variables, short‐horizon return predictability in the U.S. stock market is local in time as short periods with significant predictability (“pockets”) are interspersed with long periods with no return predictability. We document this result empirically using a flexible time‐varying parameter model that estimates predictive coefficients as a nonparametric function of time and explore possible explanations of this finding, including time‐varying risk premia for which we find limited support. Conversely, pockets of return predictability are consistent with a sticky expectations model in which investors slowly update their beliefs about a persistent component in the cash flow process.

Can Mutual Fund “Stars” Really Pick Stocks? New Evidence from a Bootstrap Analysis

Published: 12/2006,  Volume: 61,  Issue: 6  |  DOI: 10.1111/j.1540-6261.2006.01015.x  |  Cited by: 767

ROBERT KOSOWSKI, ALLAN TIMMERMANN, RUSS WERMERS, HAL WHITE

We apply a new bootstrap statistical technique to examine the performance of the U.S. open‐end, domestic equity mutual fund industry over the 1975 to 2002 period. A bootstrap approach is necessary because the cross section of mutual fund alphas has a complex nonnormal distribution due to heterogeneous risk‐taking by funds as well as nonnormalities in individual fund alpha distributions. Our bootstrap approach uncovers findings that differ from many past studies. Specifically, we find that a sizable minority of managers pick stocks well enough to more than cover their costs. Moreover, the superior alphas of these managers persist.

Decentralized Investment Management: Evidence from the Pension Fund Industry

Published: 5/20/2013,  Volume: 68,  Issue: 3  |  DOI: 10.1111/jofi.12024  |  Cited by: 106

DAVID BLAKE, ALBERTO G. ROSSI, ALLAN TIMMERMANN, IAN TONKS, RUSS WERMERS

Using a unique data set, we document two secular trends in the shift from centralized to decentralized pension fund management over the past few decades. First, across asset classes, sponsors replace generalist balanced managers with better‐performing specialists. Second, within asset classes, funds replace single managers with multiple competing managers following diverse strategies to reduce scale diseconomies as funds grow larger relative to capital markets. Consistent with a model of decentralized management, sponsors implement risk controls that trade off higher anticipated alphas of multiple specialists against the increased difficulty in coordinating their risk‐taking and the greater uncertainty concerning their true skills.

COORDINATION OF ECONOMIC POLICY

Published: 5/1967,  Volume: 22,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1967.tb00001.x  |  Cited by: 2

Allan Sproul

REFLECTIONS OF A CENTRAL BANKER*

Published: 3/1956,  Volume: 11,  Issue: 1  |  DOI: 10.1111/j.1540-6261.1956.tb00682.x  |  Cited by: 2

Allan Sproul

DISCUSSION

Published: 7/1988,  Volume: 43,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1988.tb04597.x  |  Cited by: 3

ALLAN W. KLEIDON

PRICE CHANGES IN EQUITY SECURITIES

Published: 9/1954,  Volume: 9,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1954.tb01229.x  |  Cited by: 1

Henry Allan Latané

CREDIT AVAILABILITY AND ECONOMIC DECISIONS: SOME EVIDENCE FROM THE MORTGAGE AND HOUSING MARKETS

Published: 6/1974,  Volume: 29,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1974.tb01482.x  |  Cited by: 25

Allan H. Meltzer

DISCUSSION

Published: 5/1970,  Volume: 25,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1970.tb00669.x  |  Cited by: 0

Allan H. Meltzer

AN ECONOMETRIC EQUITY‐MARKET MODEL: COBWEBS IN THE STOCK MARKET*

Published: 6/1971,  Volume: 26,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1971.tb01741.x  |  Cited by: 0

Gary Allan McCue

DISCUSSION

Published: 5/1983,  Volume: 38,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1983.tb02254.x  |  Cited by: 2

ALLAN W. KLEIDON, PAUL PFLEIDERER

AUERBACH'S DEFENSE OF DEFENSIVE OPERATIONS

Published: 9/1965,  Volume: 20,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1965.tb02916.x  |  Cited by: 0

Karl Brunner, Allan H. Meltzer

SOME FURTHER INVESTIGATIONS OF DEMAND AND SUPPLY FUNCTIONS FOR MONEY

Published: 5/1964,  Volume: 19,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1964.tb00767.x  |  Cited by: 101

Karl Brunner, Allan H. Meltzer

PREDICTING VELOCITY: IMPLICATIONS FOR THEORY AND POLICY*

Published: 5/1963,  Volume: 18,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1963.tb00727.x  |  Cited by: 5

Karl Brunner, Allan H. Meltzer

One Market? Stocks, Futures, and Options During October 1987

Published: 7/1992,  Volume: 47,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1992.tb03997.x  |  Cited by: 41

ALLAN W. KLEIDON, ROBERT E. WHALEY

We provide new evidence regarding the degree of integration among markets for stocks, futures and options prior to and during the October 1987 market crash. Where previous analyses have resulted in recommendations for the implementation of circuit breakers, the coordination of margin requirements across markets, and changes in regulatory jurisdiction, our analysis indicates that delinkage between markets during the crash was primarily caused by an antiquated mechanism for processing stock market orders. The results suggest that market integration may be better served by efficient order execution than by further restricting markets.To a large extent, the problems of mid‐October can be traced to the failure of these market segments [stocks, stock index futures, and stock options] to act as one. (Report of the Presidential Task Force [Brady Report] (1988, Executive Summary, p. vi)).

PORTFOLIO SELECTION: A HEURISTIC APPROACH*

Published: 12/1960,  Volume: 15,  Issue: 4  |  DOI: 10.1111/j.1540-6261.1960.tb02764.x  |  Cited by: 2

Geoffrey P. Clarkson, Allan H. Meltzer

Does the Bond Market Predict Bankruptcy Settlements?

Published: 7/1992,  Volume: 47,  Issue: 3  |  DOI: 10.1111/j.1540-6261.1992.tb04001.x  |  Cited by: 21

ALLAN C. EBERHART, RICHARD J. SWEENEY

This study shows the extent to which deviations from the absolute priority rule increase or decrease the bankruptcy emergence payoff to traded (i.e., usually junior claimants) bondholders. The data indicate that, on average, bondholders benefit, albeit slightly, from absolute priority rule (APR) violations. This paper also examines the degree to which the bond market, in the bankruptcy filing month, anticipates departures from the APR and other influences on the payoff to bondholders. In other words, we investigate the informational efficiency of the market for bankrupt bonds. Overall, despite the complex and lengthy nature of bankruptcy proceedings, the results support efficiency.

DISCUSSION

Published: 5/1974,  Volume: 29,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1974.tb03050.x  |  Cited by: 0

Stephen M. Goldfeld, Allan H. Meltzer

The Equity Performance of Firms Emerging from Bankruptcy

Published: 10/1999,  Volume: 54,  Issue: 5  |  DOI: 10.1111/0022-1082.00169  |  Cited by: 87

Allan C. Eberhart, Edward I. Altman, Reena Aggarwal

This study assesses the stock return performance of 131 firms emerging from Chapter 11. Using differing estimates of expected returns, we consistently find evidence of large, positive excess returns in 200 days of returns following emergence. We also examine the reaction of our sample firms' equity returns to their earnings announcements after emergence from Chapter 11. The positive and significant reactions suggest that our results are driven by the market's expectational errors, not mismeasurement of risk. The results provide an interesting contrast, but not a contradiction, to previous work that has documented poor operating performance for firms emerging from Chapter 11.

Accounting for Forward Rates in Markets for Foreign Currency

Published: 12/1993,  Volume: 48,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1993.tb05132.x  |  Cited by: 89

DAVID K. BACKUS, ALLAN W. GREGORY, CHRIS I. TELMER

Forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure (the intertemporal marginal rate of substitution). Representative agent theory with time‐additive preferences cannot account for either of these properties. We show that the theory does considerably better along these dimensions when the representative agent's preferences exhibit habit persistence, but that the theory fails to reproduce some of the other properties of the data—in particular, the strong autocorrelation of forward premiums.

Security Pricing and Deviations from the Absolute Priority Rule in Bankruptcy Proceedings

Published: 12/1990,  Volume: 45,  Issue: 5  |  DOI: 10.1111/j.1540-6261.1990.tb03723.x  |  Cited by: 153

ALLAN C. EBERHART, WILLIAM T. MOORE, RODNEY L. ROENFELDT

Claims ultimately awarded to shareholders of firms in reorganization were examined for a sample of 30 filings under the 1978 Bankruptcy Reform Act. We measured the amount paid to shareholders in excess of that which they would have received under the absolute priority rule and found that this amount represents, on average, 7.6% of the total awarded to all claimants. Evidence is also reported that common share values reflect a significant proportion of value ultimately received in violation of absolute priority, suggesting that deviations from the rule were expected by the equity markets.

An Examination of Long‐Term Abnormal Stock Returns and Operating Performance Following R&D Increases

Published: 3/25/2004,  Volume: 59,  Issue: 2  |  DOI: 10.1111/j.1540-6261.2004.00644.x  |  Cited by: 717

Allan C. Eberhart, William F. Maxwell, Akhtar R. Siddique

We examine a sample of 8,313 cases, between 1951 and 2001, where firms unexpectedly increase their research and development (R&D) expenditures by a significant amount. We find consistent evidence of a misreaction, as manifested in the significantly positive abnormal stock returns that our sample firms' shareholders experience following these increases. We also find consistent evidence that our sample firms experience significantly positive long‐term abnormal operating performance following their R&D increases. Our findings suggest that R&D increases are beneficial investments, and that the market is slow to recognize the extent of this benefit (consistent with investor underreaction).

DISCUSSION

Published: 5/1966,  Volume: 21,  Issue: 2  |  DOI: 10.1111/j.1540-6261.1966.tb00243.x  |  Cited by: 0

Charls F. Walker, Allan H. Meltzer, Edgar Peske, Bion B. Howard, John P. Shelton, Ragnar D. Naess