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UK stock returns and robust tests of market efficiency

UK stock returns and robust tests of market efficiency
UK stock returns and robust tests of market efficiency
We test both the unconditional and conditional Mean Variance Efficiency of the UK stockmarket, paying particular attention to choosing a suitable set of instruments for the conditional version of the model. By considering more carefully than previous authors the pricing of economic risk within the mean-variance framework we show that certain instruments can enhance the basic model structure. Given the tendency for financial market data to display non-constancy in variance and non-normality we employ the GMM procedure described in Hansen (1982), which requires much weaker distributional assumptions than the more traditional OLS techniques. We discuss forming portfolios of stocks using both size and dividend yield as a criterion to achieve a suitable spread of risk and return, and find that our conclusions are sensitive both to the method of portfolio formation and to the choice of estimator. This is an important finding given the problem of thin trading associated with the size ordering of UK stocks. We find some support for both the unconditional and conditional version of the CAPM, though we are cautious about our conclusions given the instability of the parameter estimates.
predictability, gmm, capm
0378-4266
641-660
Clare, A.D.
e9a9923a-dee5-4521-a5e1-d404befa7069
Smith, P.N.
64a3e36c-48ef-439a-bf59-28464b6f4d6e
Thomas, S.H.
51ff3b62-89ae-4190-8a9e-ed4a76c8297c
Clare, A.D.
e9a9923a-dee5-4521-a5e1-d404befa7069
Smith, P.N.
64a3e36c-48ef-439a-bf59-28464b6f4d6e
Thomas, S.H.
51ff3b62-89ae-4190-8a9e-ed4a76c8297c

Clare, A.D., Smith, P.N. and Thomas, S.H. (1997) UK stock returns and robust tests of market efficiency. Journal of Banking and Finance, 21 (5), 641-660. (doi:10.1016/S0378-4266(96)00058-1).

Record type: Article

Abstract

We test both the unconditional and conditional Mean Variance Efficiency of the UK stockmarket, paying particular attention to choosing a suitable set of instruments for the conditional version of the model. By considering more carefully than previous authors the pricing of economic risk within the mean-variance framework we show that certain instruments can enhance the basic model structure. Given the tendency for financial market data to display non-constancy in variance and non-normality we employ the GMM procedure described in Hansen (1982), which requires much weaker distributional assumptions than the more traditional OLS techniques. We discuss forming portfolios of stocks using both size and dividend yield as a criterion to achieve a suitable spread of risk and return, and find that our conclusions are sensitive both to the method of portfolio formation and to the choice of estimator. This is an important finding given the problem of thin trading associated with the size ordering of UK stocks. We find some support for both the unconditional and conditional version of the CAPM, though we are cautious about our conclusions given the instability of the parameter estimates.

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More information

Published date: 1997
Keywords: predictability, gmm, capm
Organisations: Management

Identifiers

Local EPrints ID: 37374
URI: http://eprints.soton.ac.uk/id/eprint/37374
ISSN: 0378-4266
PURE UUID: 4409e213-1557-4375-bcef-dd5e9094f19c

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Date deposited: 08 Mar 2007
Last modified: 15 Mar 2024 07:58

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Contributors

Author: A.D. Clare
Author: P.N. Smith
Author: S.H. Thomas

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