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How much stock return predictability can we expect from an asset pricing model?

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  • Zhou, Guofu

Abstract

We provide a new upper bound on the R-squared of a predictive regression of stock returns on predictable variables, tightening substantially Ross's (2005) bound. An empirical application illustrates that while Ross's bound is not binding, our bound does.

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Bibliographic Info

Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 108 (2010)
Issue (Month): 2 (August)
Pages: 184-186

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Handle: RePEc:eee:ecolet:v:108:y:2010:i:2:p:184-186

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Web page: http://www.elsevier.com/locate/ecolet

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Keywords: Predictive regression R-squared Forecasting stock return;

References

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  1. Kirby, Chris, 1998. "The Restrictions on Predictability Implied by Rational Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 11(2), pages 343-82.
  2. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 375-421, December.
  3. Doron Avramov, 2004. "Stock Return Predictability and Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 17(3), pages 699-738.
  4. Amit Goyal & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Yale School of Management Working Papers, Yale School of Management amz2412, Yale School of Management, revised 01 Jan 2006.
  5. Lubos Pastor & Robert F. Stambaugh, 2008. "Predictive Systems: Living with Imperfect Predictors," NBER Working Papers 13804, National Bureau of Economic Research, Inc.
  6. Tu, Jun & Zhou, Guofu, 2004. "Data-generating process uncertainty: What difference does it make in portfolio decisions?," Journal of Financial Economics, Elsevier, Elsevier, vol. 72(2), pages 385-421, May.
  7. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
  8. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  9. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 54(4), pages 1325-1360, 08.
  10. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 385-415, April.
  11. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 33(1), pages 3-56, February.
  12. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, Elsevier, vol. 5(2), pages 115-146, November.
  13. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2010. "Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 23(2), pages 821-862, February.
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Cited by:
  1. Tom Engsted & Stig V. Møller & Magnus Sander, 2013. "Bond return predictability in expansions and recessions," CREATES Research Papers 2013-13, School of Economics and Management, University of Aarhus.

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