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Stock return predictability and model instability: evidence from mainland China and Hong Kong
Hong, Hui; Chen, Naiwei; O'Brien, Fergal; Ryan, James
The full text of this article will not be available in ULIR until the embargo expires on the 14/11/2019 This study examines the predictability of the Shanghai Composite, Shenzhen Composite and the Hang Seng China Enterprise index returns during the period 1993 to 2010, with emphasis on whether considering structural breaks in model parameters improves the stock return predictability. Results indicate higher linear stock return predictability for the Hong Kong market than for the Chinese markets. However, the results differ when model instability is considered. Specifically, using Bai and Perron’s (1998, 2003) approach, the results indicate the presence of structural breaks particularly for the Shenzhen market, which appear to coincide with major economic events or political and institutional changes. The predictable component in stock returns is also time-varying when re-estimating the model over different subsamples defined by the break. Overall, results highlight the importance of considering breaks in forecasting stock returns, and suggest that the Hong Kong market is a relatively ideal haven to park wealth for risk-averse investors whereas the Shenzhen market offers enhanced opportunities for risk-seeking investors.
Keyword(s): model instability; structural breaks; return predictability; China; Hong Kong
Publication Date:
2018
Type: Journal article
Peer-Reviewed: Yes
Language(s): English
Institution: University of Limerick
Citation(s): The Quarterly Review of Economics and Finance;68, pp. 132-142
https://doi.org/10.1016/j.qref.2017.11.007
Publisher(s): Elsevier
First Indexed: 2018-05-04 06:25:09 Last Updated: 2018-05-04 06:25:09