Does Stock Return Predictability Imply Improved Asset Allocation and Performance? Evidence from the U.S. Stock Market (1954–2002)
AbstractThis paper provides evidence on the economic significance of the predictability in U.S. stock returns using a real-time asset allocation framework. We examine the performance of a Bayesian investor who relies on conditioning information (dividend yield, T-bill yield, default spread, and term spread) to forecast future returns and contrast it with that of an otherwise identical investor who believes in i.i.d. returns. We find that the relative performance of the information-based strategy is unstable over time, being noticeably poor during 1989–2002. In marked contrast, the strategy performs significantly better when it relies on a model-based approach based on the CAPM.
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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006)
Issue (Month): 5 (September)
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Web page: http://www.journals.uchicago.edu/JB/
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- Yufeng Han, 2010. "On the Economic Value of Return Predictability," Annals of Economics and Finance, Society for AEF, vol. 11(1), pages 1-33, May.
- Shanken, Jay & Tamayo, Ane, 2012. "Payout yield, risk, and mispricing: A Bayesian analysis," Journal of Financial Economics, Elsevier, vol. 105(1), pages 131-152.
- Barras, Laurent, 2007. "International conditional asset allocation under specification uncertainty," Journal of Empirical Finance, Elsevier, vol. 14(4), pages 443-464, September.
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