This dissertation was written as part of the MSc in
Banking and Finance
at the
International Hellenic University.
T
ime
-
series
predictability of asset prices
has been one of the most controversial subjects
for
several decades now due to its
significant theoretical and practical implications.
Empirical literature indicates s
ubstantial
evidence of time
-
varying returns
internationally, and the primary focus lies o
n retrieving specific econometric models and
explanatory variables that can capture most
, if not all,
of that predictability. Awareness
of
the
fact that
stock returns are predictable does not
specify to
investors which
components have predictive power
(Let
tau and Ludvigson, 200
1
)
.
Hence, i
t is an issue of
economic interest as long as it sheds light on investors’ decision making process and the
functioning of financial markets (Pesaran
and
Timmermann, 2000). This paper’s
motivation is to examine a particular stock index, the Financial Times Stock Exchange
100 (FTSE 100)
and
retrieve information on the forecastability of specific attributes on
it.
Specifically, t
his
thesis
examines
whether t
he Capital Asset Pricing Model (CAPM) can
explain the
stock return predictability in the British market,
based on the methodology
of
Kirby (1998),
Ferson and Harvey (1999)
and Fletcher (2001)
.
The study
retrieves
evidence
that UK stock returns are too pred
ictable and CAPM does not manage to
explain entirely the predictability generated by the predictive
variable
s
employed
. The
findings confirm previous research and indicate the necessity to stress our focus on
modifying either the explanatory instruments employed or the entire econometric
models.
Collections
Show Collections
