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Stock Return Predictability: A Bayesian Model Selection Perspective

  • K. J. Martijn Cremers
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    Attempts to characterize stock return predictability have resulted in little consensus on the important conditioning variables, giving rise to model uncertainty and data snooping fears. We introduce a new methodology that explicitly incorporates model uncertainty by comparing all possible models simultaneously and in which the priors are calibrated to reflect economically meaningful information. Our approach minimizes data snooping given the information set and the priors. We compare the prior views of a skeptic and a confident investor. The data imply posterior probabilities that are in general more supportive of stock return predictability than the priors for both types of investors. Copyright 2002, Oxford University Press.

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    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 15 (2002)
    Issue (Month): 4 ()
    Pages: 1223-1249

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    Handle: RePEc:oup:rfinst:v:15:y:2002:i:4:p:1223-1249
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    1. Dale J. Poirier, 1995. "Intermediate Statistics and Econometrics: A Comparative Approach," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161494, June.
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    5. Lubo Pástor, . "Portfolio Selection and Asset Pricing Models," CRSP working papers 356, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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    7. Fernandez, Carmen & Ley, Eduardo & Steel, Mark F. J., 2001. "Benchmark priors for Bayesian model averaging," Journal of Econometrics, Elsevier, vol. 100(2), pages 381-427, February.
    8. Lubos Pastor & Robert F. Stambaugh, . "Comparing Asset Pricing Models: An Investment Perspective," Rodney L. White Center for Financial Research Working Papers 16-99, Wharton School Rodney L. White Center for Financial Research.
    9. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
    10. Foster, F Douglas & Smith, Tom & Whaley, Robert E, 1997. " Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal R-Squared," Journal of Finance, American Finance Association, vol. 52(2), pages 591-607, June.
    11. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    12. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
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