Evaluation, predictability of excess stock returns, stock market, stock prices
First and foremost, predictability of excess returns in the stock markets is an issue which is affected by not just a factor but many factors in the environment. The issues which daily affects the markets such as politics and economical environments will definitely affect the predictability of stock returns. The companies which are in the stock markets also find it a hard nut to crack regarding the predictability of excess returns. Specifically for this factor pertaining to predictability of excess stock returns, it basically means that the company in question incurred abnormal profits in the course of their business. This is a phenomenon which is supposedly not possible to happen since it is coined in that the stock prices are transparent and they show exactly the performance of a company in the industry in its entirety without leaving anything to chance.
[...] As earlier pointed out, the predictability of excess stock returns depends on various factors. Factors such as market crashes, political crises, economic crises, economic bubbles as well as major regulatory changes by the government affects the predictability of stock returns. During crashes in the stock markets, there is a high degree of uncertainty in the returns; this is associated with different measures of return predictability. However, in times of economic and political crises, there is a high degree of return predictability where the obvious prediction is a reduction in the stock market prices. [...]
[...] 868-879. Johnson, T. c Rational Momentum Effects. The Journal of Finance, LVII(2), p Werner F. M De Bont, R. H. T Anomalies: A Mean-Reverting Walk Down Wall Street. Journal of Ecconomic Perspectives, III(1), pp. 189-202. [...]
[...] This means that the possibility of predicting excess returns of a stock which is growing constantly is a hard issue. The reason for this is that, for a growing product, the predictability can only be made in the short term. Predicting on a long term basis leads to uncertainty since simple fluctuations in the market conditions would definitely affect the returns of a stock. The issue of abnormal returns has several inferences which are nevertheless not affected in a large magnitude by the model of expected returns. [...]
[...] Based on the arguments documented here, the predictability of stock returns is something that can basically not be done. The argument is that all there are about the future of the stock markets is basically news. News is always unpredictable since if something could be predicted then it ceases being news. This being the case, predicting the excess returns from securities is by all means an impossible undertaking. The reason as to why there is a deep conviction among some people that it could be possible for them to predict excess returns for a stock unit in the future are based majorly on the past information and extrapolation of economic trends. [...]
[...] All in all, the predictability of excess stock market returns is evidenced by various factors as evaluated in detail above. The use of return predictability as a test for the efficiency in the market is a good approach. First and foremost, there should be a predictable performance in a market. If this factor is not observed in the stock markets, it indicates that the market is not efficient. Efficient markets are those which are not adversely affected by issues such as political interferences. [...]
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