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Business Review

Article Title

On predictability in South Asian stock markets

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. JEL Codes: C22, C53, G14

Keywords

stock return predictability; unobserved components; fat tails; stable distributions

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Published Online

February 22, 2021

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