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Subsampling-Based Tests of Stock-Return Predictability


  • In Choi
  • Timothy K. Chue


We develop subsampling-based tests of stock-return predictability and apply them to U.S. data. These tests allow for multiple predictor variables with local-to-unit roots. By contrast, previous methods that model the predictor variables as nearly integrated are only applicable to univariate predictive regressions. Simulation results demonstrate that our subsampling-based tests have desirable size and power properties. Using stock-market valuation ratios and the risk-free rate as predictors, our univariate tests show that the evidence of predictability is more concentrated in the 1926-1994 subperiod. In bivariate tests, we find support for predictability in the full sample period 1926-2004 and the 1952-2004 subperiod as well. For the subperiod 1952-2004, we also consider a number of consumption-based variables as predictors for stock returns and find that they tend to perform better than the dividend-price ratio. Among the variables we consider, the predictive power of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001a, 2001b) seems to be the most robust. Among variables based on habit persistence, Campbell and Cochrane's (1999) nonlinear specication tends to outperform a more traditional, linear specification.

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  • In Choi & Timothy K. Chue, 2006. "Subsampling-Based Tests of Stock-Return Predictability," Hi-Stat Discussion Paper Series d06-178, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hst:hstdps:d06-178

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    References listed on IDEAS

    1. Wing Thye Woo, "undated". "Chinese Economic Growth: Sources And Prospects," Department of Economics 96-08, California Davis - Department of Economics.
    2. Wu, Harry X, 2000. "China's GDP Level and Growth Performance: Alternative Estimates and the Implications," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 46(4), pages 475-499, December.
    3. Wu, Harry X, 2002. "How Fast Has Chinese Industry Grown?--Measuring the Real Output of Chinese Industry, 1949-97," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 179-204, June.
    4. Angus Maddison, 2006. "DO OFFICIAL STATISTICS EXAGGERATE CHINA's GDP GROWTH? A REPLY TO CARSTEN HOLZ," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 52(1), pages 121-126, March.
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    More about this item


    Subsampling; local-to-unit roots; predictive regression; stock-return predictability; consumption-based models;

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