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How much stock return predictability can we expect from an asset pricing model?

  • Zhou, Guofu

We provide a new upper bound on the R-squared of a predictive regression of stock returns on predictable variables, tightening substantially Ross's (2005) bound. An empirical application illustrates that while Ross's bound is not binding, our bound does.

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File URL: http://www.sciencedirect.com/science/article/B6V84-502GGY6-6/2/d7faedf6af8d8d97ab1d2537248d4194
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Article provided by Elsevier in its journal Economics Letters.

Volume (Year): 108 (2010)
Issue (Month): 2 (August)
Pages: 184-186

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Handle: RePEc:eee:ecolet:v:108:y:2010:i:2:p:184-186
Contact details of provider: Web page: http://www.elsevier.com/locate/ecolet

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  1. Campbell, John, 1987. "Stock Returns and the Term Structure," Scholarly Articles 3207699, Harvard University Department of Economics.
  2. David E. Rapach & Jack K. Strauss & Guofu Zhou, 2010. "Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy," Review of Financial Studies, Society for Financial Studies, vol. 23(2), pages 821-862, February.
  3. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
  4. Kirby, Chris, 1998. "The Restrictions on Predictability Implied by Rational Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 343-82.
  5. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
  6. Pástor, Luboš & Stambaugh, Robert F., 2007. "Predictive Systems: Living with Imperfect Predictors," CEPR Discussion Papers 6076, C.E.P.R. Discussion Papers.
  7. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  8. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, 08.
  9. Tu, Jun & Zhou, Guofu, 2004. "Data-generating process uncertainty: What difference does it make in portfolio decisions?," Journal of Financial Economics, Elsevier, vol. 72(2), pages 385-421, May.
  10. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  11. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
  12. Doron Avramov, 2004. "Stock Return Predictability and Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 699-738.
  13. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
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