The prevailing view in finance is that the evidence for long-horizon stock return predictability is significantly stronger than that for short horizons. We show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability. For example, for the persistence levels of dividend yields, the analytical correlation is 99% between the 1- and 2-year horizon estimators and 94% between the 1- and 5-year horizons, due to the combined effects of overlapping returns and the persistence of the predictive variable. Common sampling error across equations leads to ordinary least squares coefficient estimates and R2s that are roughly proportional to the horizon under the null hypothesis. This is the precise pattern found in the data. The asymptotic theory is corroborated, and the analysis extended by extensive simulation evidence. We perform joint tests across horizons for a variety of explanatory variables, and provide an alternative view of the existing evidence.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11841.
Length: Date of creation: Dec 2005 Date of revision: Handle: RePEc:nbr:nberwo:11841
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data) C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
John H. Cochrane, 1999.
"New Facts in Finance,"
CRSP working papers
490, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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Campbell, John Y., 2003.
"Consumption-based asset pricing,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887
Elsevier.
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