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Changing Risk-Return Profiles

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Abstract

Are stock returns predictable? This question is a perennially popular subject of debate. In this post, we highlight some results from our recent working paper, where we investigate the matter. Rather than focusing on a single object like the forecasted mean or median, we look at the entire distribution of stock returns and find that the realized volatility of stock returns, especially financial sector stock returns, has strong predictive content for the future distribution of stock returns. This is a robust feature of the data since all of our results are obtained with real-time analyses using stock return data since the 1920s. Motivated by this result, we then evaluate whether the banking system appears healthier today, and if recent regulatory reforms have helped.

Suggested Citation

  • Richard K. Crump & Domenico Giannone & Sean Hundtofte, 2018. "Changing Risk-Return Profiles," Liberty Street Economics 20181004, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87282
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    Cited by:

    1. Filippo Busetto, 2024. "Asymmetric expectations of monetary policy," Bank of England working papers 1058, Bank of England.
    2. Nina Boyarchenko & Domenico Giannone & Or Shachar, 2018. "Flighty liquidity," Staff Reports 870, Federal Reserve Bank of New York.
    3. Martina Hengge, 2019. "Uncertainty as a Predictor of Economic Activity," IHEID Working Papers 19-2019, Economics Section, The Graduate Institute of International Studies.
    4. Richard K. Crump & João A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.

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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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