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Mitianoudis, N., Dergiades, T. Stock Prices Predictability at Long-horizons: Two Tales from the Time-Frequency Domain. Credit and Capital Markets – Kredit und Kapital, 50(1), 37-61. https://doi.org/10.3790/ccm.50.1.37
Mitianoudis, Nikolaos and Dergiades, Theologos "Stock Prices Predictability at Long-horizons: Two Tales from the Time-Frequency Domain" Credit and Capital Markets – Kredit und Kapital 50.1, 2017, 37-61. https://doi.org/10.3790/ccm.50.1.37
Mitianoudis, Nikolaos/Dergiades, Theologos (2017): Stock Prices Predictability at Long-horizons: Two Tales from the Time-Frequency Domain, in: Credit and Capital Markets – Kredit und Kapital, vol. 50, iss. 1, 37-61, [online] https://doi.org/10.3790/ccm.50.1.37

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Stock Prices Predictability at Long-horizons: Two Tales from the Time-Frequency Domain

Mitianoudis, Nikolaos | Dergiades, Theologos

Credit and Capital Markets – Kredit und Kapital, Vol. 50 (2017), Iss. 1 : pp. 37–61

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Dr. Nikolaos Mitianoudis, Democritus University of Thrace, 67100 Xanthi, Greece

Dr. Theologos Dergiades, University of Macedonia, 54006 Thessaloniki, Greece

Abstract

Accepting non-linearities as an endemic feature of financial data, this paper re-examines Cochrane"s „new fact in finance" hypothesis (Cochrane, Economic Perspectives-FRB of Chicago 23, 36–58, 1999). By implementing two methods, frequently encountered in digital signal processing analysis, (Undecimated Wavelet Transform and Empirical Mode Decomposition both methods extract components in the time-frequency domain), we decompose the real stock prices and the real dividends, for the US economy, into signals that correspond to distinctive frequency bands. Armed with the decomposed signals and acting within a non-linear framework, the predictability of stock prices through the use of dividends is assessed at alternative horizons. It is shown that the „new fact in finance" hypothesis is a valid proposition, provided that dividends contribute significantly to predicting stock prices at horizons spanning beyond 32 months. The identified predictability is entirely non-linear in nature.