Review of Managerial Science

, Volume 7, Issue 2, pp 159–189 | Cite as

Return predictability and social dynamics

Review paper
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Abstract

The ability to predict stock returns from financial ratios is a long-standing but still controversial topic. There is ongoing debate about the empirical evidence as well as about appropriate theoretical explanations. We provide evidence from a simulated economy that local, social interaction among agents is remarkably successful in matching several established empirical facts. We find significant return predictability at various forecast horizons, absence of dividend growth predictability, high persistence in dividend yields, and absence of significant return autocorrelations. Our results suggest that social dynamics are a simple, intuitively appealing and successful way to explain predictability.

Keywords

Return predictability Predictive regressions Social dynamics Hidden Markov Chain Agent-based models 

JEL Classification

G17 G12 D80 E37 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2013

Authors and Affiliations

  1. 1.Department of EconomicsInnsbruck UniversityInnsbruckAustria
  2. 2.Department of Banking and FinanceInnsbruck UniversityInnsbruckAustria

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