Forecasting Stock Returns During Good and Bad Times
Singapore Management University - Lee Kong Chian School of Business
Central University of Finance and Economics (CUFE) - School of Finance
Singapore Management University - Lee Kong Chian School of Business
Washington University in St. Louis - Olin School of Business
March 2015
27th Australasian Finance and Banking Conference 2014 Paper
Abstract:
We show that stock returns can be significantly predicted by past realized returns in both good and bad times, in and out of sample. We extend the model in Fama and French (1988) to show that stock returns display mean reversion and momentum over time, which is dependent on the market state. Specifically, past stock returns predict future returns negatively in good times and positively in bad times, which is consistent consistent with the change and level effects in P´astor and Stambaugh (2009).
Number of Pages in PDF File: 49
Keywords: Return predictability; Mean reversion; Momentum; Market risk premium; Leading economic indicator; 200-day moving average; Business cycle
JEL Classification: C53, C58, G12, G14, G17
