NON‐LINEAR PREDICTABILITY IN G7 STOCK INDEX RETURNS*

Abstract

This paper re‐examines the persistence and source of non‐linear predictability in the stock markets of G7 countries. Applying the Brock–Dechert–Scheinkman (BDS) test on autoregression (AR)‐filtered returns in rolling estimation windows, we find evidence of local non‐linear predictability in all the sampled stock markets. To identify the source, we apply the BDS test on AR‐generalized autoregressive conditional heteroskedasticity (GARCH)‐filtered returns in rolling windows. After accounting for conditional heteroskedasticity, we still find brief time periods with non‐linear predictability in all markets, contradicting the weak‐form efficient markets hypothesis.

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