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Payout yield, risk, and mispricing: A Bayesian analysis

  • Shanken, Jay
  • Tamayo, Ane

We develop a simple parametric model in which hypotheses about predictability, mispricing, and the risk-return tradeoff can be evaluated simultaneously, while allowing for time variation in both risk and expected return. Most of the return predictability based on aggregate payout yield is unrelated to market risk. We consider a range of Bayesian prior beliefs about the risk-return tradeoff and the extent to which predictability is driven by mispricing. The impact of these beliefs on an investor's certainty-equivalent return when choosing between a market index and riskless T-bills is economically significant, in both ex ante and out-of-sample analyses.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 105 (2012)
Issue (Month): 1 ()
Pages: 131-152

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Handle: RePEc:eee:jfinec:v:105:y:2012:i:1:p:131-152
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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