Risk-free returns and non-liquidity of the market signal for predicting future market returns

Document Type : Original Article

Authors
zahra joudaki chegeni 1
zahra Heydari Sureshjani 2
1 Department of Accounting, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran
2 Department of Accounting, Faculty of Economic and Administrative Sciences, Isfahan University, Isfahan, Iran
10.30495/jik.2024.23764
Abstract
Predicting returns, unlike historical return calculations, has many complexities. Predicting capital market returns is very complex due to its impact on many factors and variables and is often accompanied by deviations and errors. Due to the high importance of predicting capital market returns in economic decisions, both at the micro and macro levels, researchers have always tried to estimate the impact of variables as a signal to estimate the future return on capital markets. In this study, risk-free returns and lack of market liquidity are used to determine the predictability of future returns. Therefore, this study examines risk-free returns and lack of market liquidity as a signal for predicting future market returns. This study uses time series data of Iran Stock Exchange from 2008 to 2020. The results showed that lack of liquidity can be a good signal to predict market returns with a frequency of one month and the next quarter; However, it is not able to predict the return of the 12-month market frequency, and its adjusted coefficient of determination showed that the predictability values of the return decrease with increasing time frequency. risk-free interest rate has the ability to predict market returns in the frequency of one month, three months and twelve months, and its adjusted coefficient of determination showed that with increasing time frequency, the predictability of market returns will increase. lack of stock market liquidity can better predict short-term future returns, but interest rates have a high signaling ability for both short-term and long-term periods
Keywords
risk-free return
predictability of return
lack of market liquidity
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