Profitability of Expectation Based on Trading Rules: A Study on Kuwait Stock Market
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Published
Sep 1, 2008
Abstract
This paper provides empirical evidence on the profitability of the alternative expectation formation mechanisms in the case of Kuwait Stock Exchange as an example of an emerging market. The results indicate that both extrapolative and adaptive expectations are profitable while regressive expectations are not. In addition, the results imply that extrapolative expectations are more profitable than adaptive. An important conclusion of this paper is that the market suffers form inefficiency since future trend of the market can be predicted from its past performance, a phenomenon shared by emerging markets.
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Keywords
Kuwait Stock Market
References
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• DeBondt, W. (1993), "Betting on Trends: Intuitive Forecasts of Financial Risk and Return", International Journal qf Forecasting, Vol. 9, pp. 355-371.
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• Frankel, J. and Froot, K. ( 1987), "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations", American Economic Review, Vol. 77, pp. 133-153.
• Hong, H. and Stein, J. (2003), "Simple Forecasts and Paradigm Shifts", National Bureau of Economic Research, Working Paper 10013.
• Lansing K. (2005), "Lock-in of Extrapolative Expectations in an Asset Pricing Model", Federal Reserve Bank of San Francisco, Working Paper 2004-06.
• LeRoy, S. and Porter, R. (1981), "The Present-Value Relation: Tests Based on Implied Variance Bounds", Econometrica, Vol. 49, pp. 555-577.
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• Moosa, I. (2002), "A Test of the Post Keynesian Hypothesis on Expectation Formation in the Foreign Exchange Market", Journal of Post Keynesian Economics, 24, 443-457.
• Pilbeam, K. ( 1995), "Exchange Rate Models and Exchange Rate Expectations: An Empirical Investigation", Applied Economics, Vol. 27, pp. 1009-1115.
• Qiu, L. and Welch, I. (2004), "Investment Sentiment Measures", NBER, Working Paper 10794.
• Ritter, J. and War, R. (2002), "The Decline in Inflation and the Bull market of 1982-1999", Journal of Financial and Quantitative Analysis, Vol. 37, pp. 29-61.
• Roberts, J. (1997), "Is Inflation Sticky?", Journal of Monetary Economics, 39, 173-196.
• Shiller, R. (1981), "Do Stock Prices Move Too Much to be Justified by Subsequent Dividends?", American Economic Review, Vol. 71, pp. 421-436.
• Shiller, R. (2000), "Irrational Exuberance Princeton", Princeton University Press.
• Takagi, S. (1991 ), "Exchange Rate Expectations: A Survey of Survey Studies", International Monetary Fund Staff Papers, Vol. 38, pp. 156-183.
• Vissing-Jorgensen, A. (2004), "Perspectives on Behavioral Finance: Does "Irrationality" Disappear with Wealth? Evidence from Expectations and Actions", In Gertler, M. and Rogoff, K. (eds.), NBER Macroeconomics Annual 2003, 139-194. Cambridge, MA: MIT Press.
• Branch, W. (2004), "Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations", Economic Journal, Vol. 114, pp. 592-621.
• Campbell, J. and Vuolteenaho, T. (2004), "Inflation Illusion and Stock Prices", American Economic Review, Papers and Proceedings Vol. 94, pp. 19-23.
• Carroll, C. (2003), "Macroeconomic Expectations of Households and Professional Forecasters", Quarterly Journal of Economics, Vol. 118, pp 269-298.
• Chan, L., Karceski, J. and Lakonishok, J. (2003), "The Level and Persistence of Growth Rates", Journal of Finance, Vol. 58, pp. 643-684.
• Choe, B. (1990), "Rational Expectations and Commodity Price Forecasts", The World Bank, International Economics Department, Working Paper, WPS 435.
• Chow, G. (1989), "Rational Versus Adaptive Expectations in Present Value Models", Review of Economics and Statistics, Vol. 71, pp. 385-393.
• Clarke, G. and Statman, M. (1998), "Bullish or Bearish?", Financial Analysts Journal, Vol 54, pp. 63-72.
• DeBondt, W. (1991), "What Do Economists Know About the Stock Market?'', Journal of Portfolio Management, Vol. 17, pp. 84-91.
• DeBondt, W. (1993), "Betting on Trends: Intuitive Forecasts of Financial Risk and Return", International Journal qf Forecasting, Vol. 9, pp. 355-371.
• Dornbusch, R. (1976), "Expectations and Exchange Rate Dynamics", Journal ofPolitical Economy, Vol. 84, pp. 1161-1176.
• Durell, A. (2001), "Stock Market Expectations and Stock Market Returns", Dartmouth College, Working Paper.
• Easterwood, J. and Nutt, S. (1999), "Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?", Journal qf Finance, Vol. 54, pp. 1777- 1797.
• Fama, E. and French, K. {1988), "Permanent and Temporary Components of Stock Prices", Journal q{ Political Economy, Vol. 96, pp. 246-273.
• Fisher, K. and Statman, M. (2000), "Investor Sentiment and Stock Returns", Financial Analysts Journal, March! April, 16-23.
• Frankel, J. and Froot, K. ( 1987), "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations", American Economic Review, Vol. 77, pp. 133-153.
• Hong, H. and Stein, J. (2003), "Simple Forecasts and Paradigm Shifts", National Bureau of Economic Research, Working Paper 10013.
• Lansing K. (2005), "Lock-in of Extrapolative Expectations in an Asset Pricing Model", Federal Reserve Bank of San Francisco, Working Paper 2004-06.
• LeRoy, S. and Porter, R. (1981), "The Present-Value Relation: Tests Based on Implied Variance Bounds", Econometrica, Vol. 49, pp. 555-577.
• Mankiw, N., Reis, R. and Wolfers J. (2004), "Disagreement about Inflation Expectations", In Gertler, M. and Rogoff, K. (eds.), NBER Macroeconomics Annual2003, 209-248, Cambridge, MA: MIT Press.
• Modigliani, F. and Cohn, R. (1979), "Inflation, Rational Valuation and the Market", Financial Analysts Journal, Vol. 35, pp. 24-44.
• Moosa, I. (2002), "A Test of the Post Keynesian Hypothesis on Expectation Formation in the Foreign Exchange Market", Journal of Post Keynesian Economics, 24, 443-457.
• Pilbeam, K. ( 1995), "Exchange Rate Models and Exchange Rate Expectations: An Empirical Investigation", Applied Economics, Vol. 27, pp. 1009-1115.
• Qiu, L. and Welch, I. (2004), "Investment Sentiment Measures", NBER, Working Paper 10794.
• Ritter, J. and War, R. (2002), "The Decline in Inflation and the Bull market of 1982-1999", Journal of Financial and Quantitative Analysis, Vol. 37, pp. 29-61.
• Roberts, J. (1997), "Is Inflation Sticky?", Journal of Monetary Economics, 39, 173-196.
• Shiller, R. (1981), "Do Stock Prices Move Too Much to be Justified by Subsequent Dividends?", American Economic Review, Vol. 71, pp. 421-436.
• Shiller, R. (2000), "Irrational Exuberance Princeton", Princeton University Press.
• Takagi, S. (1991 ), "Exchange Rate Expectations: A Survey of Survey Studies", International Monetary Fund Staff Papers, Vol. 38, pp. 156-183.
• Vissing-Jorgensen, A. (2004), "Perspectives on Behavioral Finance: Does "Irrationality" Disappear with Wealth? Evidence from Expectations and Actions", In Gertler, M. and Rogoff, K. (eds.), NBER Macroeconomics Annual 2003, 139-194. Cambridge, MA: MIT Press.
How to Cite
Al-Omar, Husain A., and Husain F. Al-Muraikhi. 2008. “Profitability of Expectation Based on Trading Rules: A Study on Kuwait Stock Market”. Studies in Business and Economics 14 (2). https://doi.org/10.29117/sbe.2008.0050.
Section
Articles