Long-Horizon stock returns predictability : evidence from the Stock Exchange of Thailand

Abstract

The primary purpose of this dissertation is to investigate the behavior of the stock returns over long horizons using the data from the Stock Exchange of Thailand. In Chapter 2, the long-run relationship between stock prices and dividends is investigated. The null hypothesis of no cointegration using both the Engle-Granger and Johansen cointegration tests cannot be rejected; however, when the structural break is addressed, the Gregory-Hansen cointegration test reports the significant evidence of the long-run relationship between stock prices and dividends. Chapter 3 explores the evidence of structural break in dividend-price ratio. The Bai and Perron’s (1998) structural break test shows that there is one break located on October 1986. The results show that the long-horizon returns predictability is strong and increasing over time horizons. Moreover, the information of structural break both in mean of predictor and in cointegrating relationship is important and hence should not be ignored. These findings explain the weak evidence of return predictability in past literatures, in which those models were misspecified. Chapter 4 further examines the relationship between stock prices and dividends in VAR and VECM. The issue of permanent and transitory components in stock prices and dividends has been emphasized in particular. Interestingly, the results from IRFs show that the effect of price shock is dried out quickly over time while that of dividend shock is not. These imply that the price shock has temporary effect whereas the dividend shock has permanent effect. In addition, the results from VD provide evidence that most of fluctuation in stock prices can be explained by their own innovation. In other words, the stock prices move according to price shocks or discount rate shocks similar to those reported in Cochrane (1994, 2011). In summary, stock prices gradually revert back to their long-term equilibrium and dividends are unpredictable.