This 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.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 79 (2006) Issue (Month): 5 (September) Pages: 2423-2468 Download reference. The following formats are available: HTML
(with abstract),
plain text
(with abstract),
BibTeX,
RIS (EndNote, RefMan, ProCite),
ReDIF