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Testing for persistence in stock returns with GARCH-stable shocks

Prasad Bidarkota () and J. Huston McCulloch

Quantitative Finance, 2004, vol. 4, issue 3, 256-265

Abstract: We investigate persistence in CRSP monthly excess stock returns, using a state space model with stable disturbances. The non-Gaussian state space model with volatility persistence is estimated by maximum likelihood, using the optimal filtering algorithm given by Sorenson and Alspach (1971 Automatica 7 465-79). The conditional distribution has a stable α of 1.89, and normality is strongly rejected even after accounting for GARCH. However, stock returns do not contain a significant mean-reverting component. The optimal predictor is the unconditional expectation of the series, which we estimate to be 9.8% per annum.

Date: 2004
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Citations: View citations in EconPapers (10)

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DOI: 10.1088/1469-7688/4/3/002

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