Predicting stock returns in an efficient market
Article Abstract:
An intertemporal general equilibrium model relates financial asset returns to movements in aggregate output. the model is a standard neoclassical growth model with serial correlation in aggregate output. Changes in aggregate output lead to attempts by agents to smooth consumption, which affects the required rate of return on financial assets. Since aggregate output is serially correlated and hence predictable, the theory suggests that stock returns can be predicted based on rational forecasts of output. The empirical results confirm that stock returns are a predictable function of aggregate output and also support the accompanying implications of the model. (Reprinted by permission of the publisher.)
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1990
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Earnings announcements, stock price adjustment, and the existence of option markets
Article Abstract:
Stock option trading has a definite effect on stock price behavior. Empirical studies to date have focused on time period comparisons, by assessing stock prices and values at two points in time, divided by an event that affected the stock's price. This study centers on a different variable, the effect of quarterly earnings adjustments on stocks of firms that list options and those that do not. Results suggest that information has a different effect on the stock prices of firms with listed options than those firms without them. Stock prices of nonoption companies are much slower to adjust to information about quarterly earnings, suggesting that informed investors favor firms with options.
Publication Name: Journal of Finance
Subject: Business
ISSN: 0022-1082
Year: 1986
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