Revista Española de Economía – 9.Extra 1 (1992), 33-55
Keywords: nonparametric regression, risk modelling, Spanish stock market
Abstract: This paper investigates whether it is possible to affirm that the Spanish stock market is efficient, i.e. the expected market return only depends on the risk which investors have taken, and therefore no variable is useful in forecasting future returns. On analysing this efficiency, there is always one problem: the variable risk is not observable. In this paper we have modelled this variable using non-parametric techniques. We have also modelled volatility using traditional techniques and have compared the results. The conclusion is that the Spanish stock market is efficient to a great extent, but this efficiency is not perceived if risk is modelled in an incorrect way.