McGraw-Hill

184 Seledine Securities
11. Further confirming evidence is provided by various criteria that
determine the order of a stochastic process. Akaiie's (1969) AIC
criterion determines the order of autoregressive processes. The
Hannan-Rissanen (1982,1983) criterion determines the order of
autoregressive/moving-average (ARMA) processes. Both indicate
that this return series cannot be successfully modeled as an ARh4A
process. Significant autocorrelation patterns exist for pure returns to
some other equity attributes. See Jacobs and Levy (1988b).
12 Makridakis, Wheelwright, and M&% (1983) observe (p. 18): "Unlike
explanatory forecasting, time-series forecasting treats the system as a
black box and makes no attempt to discover the factors affecting its
behavior."
13. Chan and Chen (1988b) form two mimicking portfolio-ne of firms
in distress, as measured by reductions in dividend payments, and
another of highly leveraged smaller firms. They find smaller firms
have higher sensitivities to the mimicking portfolios than do larger
firms, even after controlling for firm size.
14. Siar variables were used by Chan, Chen, and Hsieh (1985) to
investigate links with the size effect, by Chen, Roll, and Ross (1986)
to investigate links with stock returns, and by Fama and French
(1987) to investigate links with stock and bond returns. These studies
transform the variables; for instance, default spread measures are
formed from the difference between yields, or returns, on lowquality
corporate and government bonds. The default spread, and
other spreads, are implicitly incorporated our in approach as
differences between the independent variables.
15. Jacobs and Levy have demonstrated, for example, that value
considerations alone are insufficient to explain security pricing. For
instance, the effectiveness of the dividend discount model is
dependent on market psychology [see Jacobs Levy and (1988c)J. And
Japanese investments in U.S. stocks, which are generally
concentrated in larger companies, are influenced by the dollar/yen
exchange rate. For expository purposes, however, liited we our
investigation to the six valuation variables.
16. Although standard VAR models use a uniform lag length for all
variables, Hsiao (1981) has proposed a stopping-point criterion for
choosing the optimal lag length for each variable in each equation.
17. For a critique of the usefulness of VAR models for understanding
macroeconomic relationships, see Runkle (1987). VAR modeling for
small-scale applications was first proposed (1980).
by S i