COINTEGRATION AND PREDICTABILITY OF ASSET PRICES

Citation
Gm. Caporale et N. Pittis, COINTEGRATION AND PREDICTABILITY OF ASSET PRICES, Journal of international money and finance, 17(3), 1998, pp. 441-453
Citations number
29
Categorie Soggetti
Business Finance
ISSN journal
02615606
Volume
17
Issue
3
Year of publication
1998
Pages
441 - 453
Database
ISI
SICI code
0261-5606(1998)17:3<441:CAPOAP>2.0.ZU;2-4
Abstract
This article argues that whatever concerns one might have about the id entification of a cointegrating relationship with market inefficiency, cointegration tests can still be usefully employed to investigate the predictability of asset prices. We examine the case of n-dimensional systems, and show that the standard assumption made in the literature that cointegration implies predictability of all n asset prices is not valid. In the presence of r cointegrating vectors, only r prices are predictable, and standard Wald or LM tests carried out within Johansen 's Maximum Likelihood (ML) framework can be used to establish for whic h prices unpredictability does not hold. Similarly, one can distinguis h between (joint) unpredictability in the short- and long-run when ass et prices are driven by fundamentals. (C) 1998 Elsevier Science Ltd. A ll rights reserved.