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On the Predictability of Stock Returns: An Asset-Allocation Perspective

  • Shmuel Kandel
  • Robert F. Stambaugh

The predictability of monthly stock returns is investigated from the perspective of a risk-averse investor who uses the data to update initially vague beliefs about the conditional distribution of returns. The optimal stocks-versus-cash allocation of the investor can depend importantly on the current value of a predictive variable, such as dividend yield, even though a null hypothesis of no predictability might not be rejected at conventional significance levels. When viewed in this economic context, the empirical evidence indicates a strong degree of predictability in monthly stock returns.

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File URL: http://www.nber.org/papers/w4997.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4997.

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Date of creation: Jan 1995
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Publication status: published as Journal of Finance 51 (1996):385-424.
Handle: RePEc:nbr:nberwo:4997
Note: AP
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  1. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
  2. Detemple, Jerome B, 1986. " Asset Pricing in a Production Economy with Incomplete Information," Journal of Finance, American Finance Association, vol. 41(2), pages 383-91, June.
  3. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  4. Shmuel Kandel & Robert F. Stambaugh, 1991. "Asset Returns and Intertemporal Preferences," NBER Working Papers 3633, National Bureau of Economic Research, Inc.
  5. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
  6. John Y. Campbell, 1985. "Stock Returns and the Term Structure," NBER Working Papers 1626, National Bureau of Economic Research, Inc.
  7. Philippe Jorion & William N. Goetzmann, 1998. "A Longer Look at Dividend Yields," Yale School of Management Working Papers ysm41, Yale School of Management.
  8. 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.
  9. Frost, Peter A. & Savarino, James E., 1986. "An Empirical Bayes Approach to Efficient Portfolio Selection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 293-305, September.
  10. Black, Fischer, 1990. "Mean Reversion and Consumption Smoothing," Review of Financial Studies, Society for Financial Studies, vol. 3(1), pages 107-14.
  11. Gennotte, Gerard, 1986. " Optimal Portfolio Choice under Incomplete Information," Journal of Finance, American Finance Association, vol. 41(3), pages 733-46, July.
  12. Dothan, Michael U & Feldman, David, 1986. " Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable Economy," Journal of Finance, American Finance Association, vol. 41(2), pages 369-82, June.
  13. Jorion, Philippe, 1985. "International Portfolio Diversification with Estimation Risk," The Journal of Business, University of Chicago Press, vol. 58(3), pages 259-78, July.
  14. Jorion, Philippe, 1986. "Bayes-Stein Estimation for Portfolio Analysis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(03), pages 279-292, September.
  15. Feldman, David, 1989. " The Term Structure of Interest Rates in a Partially Observable Econom y," Journal of Finance, American Finance Association, vol. 44(3), pages 789-812, July.
  16. Feldman, David, 1992. "Logarithmic Preferences, Myopic Decisions, and Incomplete Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(04), pages 619-629, December.
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