Temporary Components of Stock Returns: What Do the Data Tell Us?

Within the past few years several articles have suggested that returns on large equity portfolios may contain a significant predictable component at horizons 3 to 6 years. Subsequently, the tests used in these analyses have been criticized (appropriately) for having widely misunderstood size and pow...

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Bibliographic Details
Published in:The Review of financial studies 1996, Vol.9 (4), p.1033-1059
Main Authors: Lamoureux, Christopher G, Zhou, Guofu
Format: Article
Language:English
Subjects:
Hypotheses
Portfolio management
Prices
Random variables
Rates of return
Securities markets
Statistical methods
Stock exchange
Stock returns
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Summary:Within the past few years several articles have suggested that returns on large equity portfolios may contain a significant predictable component at horizons 3 to 6 years. Subsequently, the tests used in these analyses have been criticized (appropriately) for having widely misunderstood size and power, rendering the conclusions inappropriate. This criticism however has not focused on the data, it addressed the properties of the tests. In this article we adopt a subjectivist analysis--treating the data as fixed--to ascertain whether the data have anything to say about the permanent/temporary decomposition. The data speak clearly and they tell us that for all intents and purposes, stock prices follow a random walk.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/9.4.1033