IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Time-varying short-horizon predictability

  • Henkel, Sam James
  • Martin, J. Spencer
  • Nardari, Federico

In the G7 countries, the short-horizon performance of aggregate return predictors such as the dividend yield and the short rate appears non-existent during business cycle expansions but sizable during contractions. This phenomenon appears related to countercyclical risk premiums as well as the time-variation in the dynamics of predictors. Our empirical model outperforms the historical average out-of-sample in the US, but the results throughout the G7 are mixed.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/B6VBX-514BPP2-2/2/752fc2145b58a222edf4ea29513b94ee
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

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

Volume (Year): 99 (2011)
Issue (Month): 3 (March)
Pages: 560-580

as
in new window

Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:560-580
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ang, Andrew & Bekaert, Geert, 2004. "The Term Structure of Real Rates and Expected Inflation," CEPR Discussion Papers 4518, C.E.P.R. Discussion Papers.
  2. Mele, Antonio, 2007. "Asymmetric stock market volatility and the cyclical behavior of expected returns," Journal of Financial Economics, Elsevier, vol. 86(2), pages 446-478, November.
  3. Bekaert, Geert & Engstrom, Eric & Xing, Yuhang, 2009. "Risk, uncertainty, and asset prices," Journal of Financial Economics, Elsevier, vol. 91(1), pages 59-82, January.
  4. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael Roberts, 2004. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," NBER Working Papers 10651, National Bureau of Economic Research, Inc.
  5. Li, George, 2007. "Time-varying risk aversion and asset prices," Journal of Banking & Finance, Elsevier, vol. 31(1), pages 243-257, January.
  6. Jacob Boudoukh & Matthew Richardson & Tom Smith & Robert Whitelaw, 1999. "Regime Shifts and Bond Returns," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-010, New York University, Leonard N. Stern School of Business-.
  7. Campbell, John & Thompson, Samuel P., 2008. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?," Scholarly Articles 2622619, Harvard University Department of Economics.
  8. Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 3-37, December.
  9. Goetzmann, William Nelson & Jorion, Philippe, 1993. " Testing the Predictive Power of Dividend Yields," Journal of Finance, American Finance Association, vol. 48(2), pages 663-79, June.
  10. 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.
  11. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  12. Ravi Bansal & George Tauchen & Hao Zhou, 2004. "Regime Shifts, Risk Premiums in the Term Structure, and the Business Cycle," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 396-409, October.
  13. Mankiw, N Gregory & Miron, Jeffrey A, 1986. "The Changing Behavior of the Term Structure of Interest Rates," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 211-28, May.
  14. Scott Mayfield, E., 2004. "Estimating the market risk premium," Journal of Financial Economics, Elsevier, vol. 73(3), pages 465-496, September.
  15. Amit Goyal & Ivo Welch, 2002. "Predicting the Equity Premium With Dividend Ratios," NBER Working Papers 8788, National Bureau of Economic Research, Inc.
  16. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  17. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, vol. 97(3), pages 607-635, June.
  18. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
  19. Gabriel Perez-Quiros & Allan Timmermann, 2000. "Firm Size and Cyclical Variations in Stock Returns," Journal of Finance, American Finance Association, vol. 55(3), pages 1229-1262, 06.
  20. Campbell, John, 2001. "Why Long Horizons? A Study of Power Against Persistent Alternatives," Scholarly Articles 3196341, Harvard University Department of Economics.
  21. Nelson, Charles R & Kim, Myung J, 1993. " Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, vol. 48(2), pages 641-61, June.
  22. Geske, Robert & Roll, Richard, 1983. " The Fiscal and Monetary Linkage between Stock Returns and Inflation," Journal of Finance, American Finance Association, vol. 38(1), pages 1-33, March.
  23. Fudenberg, Drew & Tirole, Jean, 1995. "A Theory of Income and Dividend Smoothing Based on Incumbency Rents," Journal of Political Economy, University of Chicago Press, vol. 103(1), pages 75-93, February.
  24. Andrew Ang & Geert Bekaert & Min Wei, 2005. "Do Macro Variables, Asset Markets or Surveys Forecast Inflation Better?," NBER Working Papers 11538, National Bureau of Economic Research, Inc.
  25. M. Hashem Pesaran & Allan Timmermann, 2002. "Market timing and return prediction under model instability," LSE Research Online Documents on Economics 24932, London School of Economics and Political Science, LSE Library.
  26. Andrew Ang & Geert Bekaert, 1998. "Regime Switches in Interest Rates," NBER Working Papers 6508, National Bureau of Economic Research, Inc.
  27. 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.
  28. Praveen Kumar, 1988. "Shareholder-Manager Conflict and the Information Content of Dividends," Review of Financial Studies, Society for Financial Studies, vol. 1(2), pages 111-136.
  29. Fama, Eugene F, 1981. "Stock Returns, Real Activity, Inflation, and Money," American Economic Review, American Economic Association, vol. 71(4), pages 545-65, September.
  30. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  31. 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.
  32. Richardson, Matthew & Stock, James H., 1989. "Drawing inferences from statistics based on multiyear asset returns," Journal of Financial Economics, Elsevier, vol. 25(2), pages 323-348, December.
  33. Lior Menzly & Tano Santos & Pietro Veronesi, 2004. "Understanding Predictability," Journal of Political Economy, University of Chicago Press, vol. 112(1), pages 1-47, February.
  34. Martin Lettau & Stijn Van Nieuwerburgh, 2006. "Reconciling the Return Predictability Evidence," NBER Working Papers 12109, National Bureau of Economic Research, Inc.
  35. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
  36. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  37. Andrew Ang & Geert Bekaert, 2002. "International Asset Allocation With Regime Shifts," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1137-1187.
  38. Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
  39. Pástor, Luboš & Stambaugh, Robert F., 2007. "Predictive Systems: Living with Imperfect Predictors," CEPR Discussion Papers 6076, C.E.P.R. Discussion Papers.
  40. Ravi Bansal & Hao Zhou, 2001. "Term structure of interest rates with regime shifts," Finance and Economics Discussion Series 2001-46, Board of Governors of the Federal Reserve System (U.S.).
  41. Jacob Boudoukh & Matthew Richardson & Robert F. Whitelaw, 2008. "The Myth of Long-Horizon Predictability," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1577-1605, July.
  42. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  43. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
  44. Gikas A. Hardouvelis, 1987. "The predictive power of the term structure during recent monetary regimes," Research Paper 8708, Federal Reserve Bank of New York.
  45. Guidolin, Massimo & Timmermann, Allan, 2007. "Asset allocation under multivariate regime switching," Journal of Economic Dynamics and Control, Elsevier, vol. 31(11), pages 3503-3544, November.
  46. Marsh, Terry A & Merton, Robert C, 1987. "Dividend Behavior for the Aggregate Stock Market," The Journal of Business, University of Chicago Press, vol. 60(1), pages 1-40, January.
  47. Geert Bekaert & Eric Engstrom, 2009. "Asset Return Dynamics under Bad Environment Good Environment Fundamentals," NBER Working Papers 15222, National Bureau of Economic Research, Inc.
  48. Avramov, Doron & Chordia, Tarun, 2006. "Predicting stock returns," Journal of Financial Economics, Elsevier, vol. 82(2), pages 387-415, November.
  49. Gray, Stephen F., 1996. "Modeling the conditional distribution of interest rates as a regime-switching process," Journal of Financial Economics, Elsevier, vol. 42(1), pages 27-62, September.
  50. Doron Avramov & John C. Chao, 2006. "An Exact Bayes Test of Asset Pricing Models with Application to International Markets," The Journal of Business, University of Chicago Press, vol. 79(1), pages 293-324, January.
  51. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  52. Harvey, Campbell R., 1988. "The real term structure and consumption growth," Journal of Financial Economics, Elsevier, vol. 22(2), pages 305-333, December.
  53. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  54. Chib S. & Jeliazkov I., 2001. "Marginal Likelihood From the Metropolis-Hastings Output," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 270-281, March.
  55. 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.
  56. Paye, Bradley S. & Timmermann, Allan, 2006. "Instability of return prediction models," Journal of Empirical Finance, Elsevier, vol. 13(3), pages 274-315, June.
  57. Valkanov, Rossen, 2003. "Long-horizon regressions: theoretical results and applications," Journal of Financial Economics, Elsevier, vol. 68(2), pages 201-232, May.
  58. Hamilton, James D. & Susmel, Raul, 1994. "Autoregressive conditional heteroskedasticity and changes in regime," Journal of Econometrics, Elsevier, vol. 64(1-2), pages 307-333.
  59. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-28.
  60. K. J. Martijn Cremers, 2002. "Stock Return Predictability: A Bayesian Model Selection Perspective," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1223-1249.
  61. Avramov, Doron, 2002. "Stock return predictability and model uncertainty," Journal of Financial Economics, Elsevier, vol. 64(3), pages 423-458, June.
  62. Tarun Chordia & Lakshmanan Shivakumar, 2002. "Momentum, Business Cycle, and Time-varying Expected Returns," Journal of Finance, American Finance Association, vol. 57(2), pages 985-1019, 04.
  63. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  64. Fama, Eugene F., 1984. "The information in the term structure," Journal of Financial Economics, Elsevier, vol. 13(4), pages 509-528, December.
  65. Brav, Alon & Graham, John R. & Harvey, Campbell R. & Michaely, Roni, 2005. "Payout policy in the 21st century," Journal of Financial Economics, Elsevier, vol. 77(3), pages 483-527, September.
  66. Nardari, Federico & Scruggs, John T., 2007. "Bayesian Analysis of Linear Factor Models with Latent Factors, Multivariate Stochastic Volatility, and APT Pricing Restrictions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(04), pages 857-891, December.
  67. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, June.
  68. Long Chen & Zhi Da & Richard Priestley, 2012. "Dividend Smoothing and Predictability," Management Science, INFORMS, vol. 58(10), pages 1834-1853, October.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:560-580. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.