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Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets

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  • Geert Bekaert
  • Robert J. Hodrick

Abstract

The paper characterizes predictable components in excess rates of returns on major equity and foreign exchange markets using lagged excess returns, dividend yields, and forward premiums as instruments. Vector autoregressive techniques demonstrate one-step-ahead predictability and provide implied long-horizon statistics. We estimate latent variable models as constrained counterparts to the VARs. The predictability of returns is related to asset pricing models by examining the volatility bounds on intertemporal marginal rates of substitution.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3790.

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Date of creation: Jul 1991
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Publication status: published as Journal of Finance, Vol. 47, No. 2 (June 1992): 467-509.
Handle: RePEc:nbr:nberwo:3790

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  17. Shmuel Kandel & Robert F. Stambaugh, . "Modeling Expected Stock Returns for Long and Short Horizons," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 42-88, Wharton School Rodney L. White Center for Financial Research.
  18. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 6(1), pages 107-123, March.
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  21. Huizinga, John, 1987. "An empirical investigation of the long-run behavior of real exchange rates," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 27(1), pages 149-214, January.
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