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Business Review

Abstract

In this research I investigate persistence in monthly excess stock returns over risk free rates in two South Asian stock markets i.e. S&P CNX 500 and KSE 100 stock price indexes using non-Gaussian state space or unobservable component model with stable distributions and volatility persistence. Results from non-Gaussian state space models show that both markets encompass volatility persistence. KSE 100 has a stable characteristic exponent of 1.748, but for S&P CNX 500 index the value for the characteristic exponent is 1.999 which shows normal behavior in this market. Both markets encompass persistent signal in returns at 10% level of significance. The efficiently estimated excess returns for S&P CNX 500 are 0.01% per month (0.12% per annum), and 0.015% per month (0.18% per annum) for KSE 100 index.

Keywords

Stock return predictability; Unobserved components; Fat tails; Stable distributions

Journal of Economic Literature Subject Codes

C22, C53, G14

Creative Commons License

Creative Commons Attribution 4.0 License
This work is licensed under a Creative Commons Attribution 4.0 License.

Published Online

February 22, 2021

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