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Maximizing Predictability in the Stock and Bond Markets

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  • Andrew W. Lo
  • A. Craig MacKinlay

Abstract

We construct portfolios of stocks and of bonds that are maximally predictable with respect to a set of ex ante observable economic variables, and show that these levels of predictability are statistically significant, even after controlling for data-snooping biases. We disaggregate the sources for predictability by using several asset groups, including industry-sorted portfolios, and find that the sources of maximal predictability shift considerably across asset classes and sectors as the return-horizon changes. Using three out-of-sample measures of predictability, we show that the predictability of the maximally predictable portfolio is genuine and economically significant.

Suggested Citation

  • Andrew W. Lo & A. Craig MacKinlay, 1995. "Maximizing Predictability in the Stock and Bond Markets," NBER Working Papers 5027, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:5027
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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