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Data Revisions And Out-Of-Sample Stock Return Predictability

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  • HUI GUO

Abstract

"It has been found that the consumption-wealth ratio (cay) constructed from revised data is a strong predictor of stock market returns. This paper shows that its out-of-sample forecasting power becomes substantially weaker if cay is estimated using information available at the time of forecast. The difference, which mainly reflects periodic revisions in consumption and labor income data, is consistent with the conjecture that cay is a theoretically motivated variable. That is, revised data outperform real-time data because the former have smaller measurement errors. Nevertheless, practitioners should be cautious when they need to use real-time cay as a forecasting variable. "("JEL "G10, G14) Copyright (c) 2008 Western Economic Association International.

Suggested Citation

  • Hui Guo, 2009. "Data Revisions And Out-Of-Sample Stock Return Predictability," Economic Inquiry, Western Economic Association International, vol. 47(1), pages 81-97, January.
  • Handle: RePEc:bla:ecinqu:v:47:y:2009:i:1:p:81-97
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    References listed on IDEAS

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    Cited by:

    1. Choi, Yongok & Jacewitz, Stefan & Park, Joon Y., 2016. "A reexamination of stock return predictability," Journal of Econometrics, Elsevier, vol. 192(1), pages 168-189.
    2. Møller, Stig V. & Rangvid, Jesper, 2015. "End-of-the-year economic growth and time-varying expected returns," Journal of Financial Economics, Elsevier, vol. 115(1), pages 136-154.
    3. Biswas, Anindya, 2014. "The output gap and expected security returns," Review of Financial Economics, Elsevier, vol. 23(3), pages 131-140.
    4. Stig V. Møller & Jesper Rangvid, 2012. "End-of-the-year economic growth and time-varying expected returns," CREATES Research Papers 2012-42, Department of Economics and Business Economics, Aarhus University.
    5. Eduard Baitinger & Christian Fieberg & Thorsten Poddig & Armin Varmaz, 2015. "Liquidity-driven approach to dynamic asset allocation: evidence from the German stock market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 29(4), pages 365-379, November.
    6. Della Corte, Pasquale & Sarno, Lucio & Valente, Giorgio, 2010. "A century of equity premium predictability and the consumption-wealth ratio: An international perspective," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 313-331, June.

    More about this item

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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