Information Flow and Stock Return Predictability

This study explores the role of information flow in stock return predictability in Iranian stock market. The empirically motivated models estimated using the monthly data of the Tehran Stock Exchange (TSE) for the period of 2001:01 to 2011:12. While Iranian stock market return is high predictable, the source of return predictability is shown to vary considerably with information flow. The results show that the relevance of the first-order autocorrelation decreases with volatility and reversely, the relevance of a conditional multifactor asset pricing model increases with volatility in this market. Furthermore, the results indicating that the local market risk and changes in oil price affect the expected aggregate return in periods of high information.