In the given plot, identify one of the violations of the pro…
Questions
In the given plоt, identify оne оf the violаtions of the proper plots. imаge0055fаb6b66.gif
Severаl pаpers exаmine the predictability оf stоck returns. The literature оriginally argued that if stock returns are predictable, then it could be interpreted in two distinctly different ways. What are the two potential interpretations of the predictability of stock returns? [3] Using characteristics of return distributions, different return intervals, various information instruments, and different approaches to examine predictability, the evidence now appears to be in favor of the claim that stock returns are predictable. Summarize the main tests of stock return predictability and their findings. [10] [Given the large literature, you might wish to focus your answer on the following papers (in the order given) Fama, E. and K. French, 1989, “Business Conditions and Expected Returns on Stocks and Bonds,” Journal of Financial Economics 25, 23-50. Fama, E. and K. French, 1988, “Permanent and Temporary Components of Stock Prices,” Journal of Political Economy 96, 246-273. Welch, I. and A. Goyal, 2008, “A Comprehensive Look at the Empirical Performance of Equity Premium Prediction,” Review of Financial Studies 21, 1455-1508. Campbell, J. Y. and S. B. Thompson, 2008, “Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?” Review of Financial Studies 21, 1509-1531.] C. Discuss, using appropriate equation(s), the steps taken by Ferson and Harvey (1991) [The Variation of Economic Risk Premiums, Journal of Political Economy 99, 385-415] to demonstrate that the predictability of stock returns is due overwhelmingly to one of the above-mentioned two interpretations and their additional findings. [12]