Semi-parametric Estimation and the Predictability of Stock Market Returns: Some Lessons from Japan.

This paper attempts to explore whether lagged variables that help predict stock returns are merely proxying for mismeasured risk. Therefore, three different ways of measuring risk are employed (i.e., semiparametric, GARCH, and lagged squared returns). In an application to Japanese data, four key predictor variables are shown to have nontrivial additional forecasting power irrespective of how they measure risk. Interestingly, unlike the United States, the level of the lagged dividend yield is not positively correlated with returns in either Japan or South Korea. Copyright 1991 by The Review of Economic Studies Limited.