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    The limits to stock return predictability

    Robertson, D. and Wright, Stephen (2009) The limits to stock return predictability. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    We examine predictive return regressions from a new angle. We ask what observable univariate properties of returns tell us about the “predictive space” that defines the true predictive model: the triplet ¡ λ, R2 x, ρ¢ , where λ is the predictor’s persistence, R2 x is the predictive R-squared, and ρ is the "Stambaugh Correlation" (between innovations in the predictive system). When returns are nearly white noise, and the variance ratio slopes downwards, the predictive space can be tightly constrained. Data on real annual US stock returns suggest limited scope for even the best possible predictive regression to out-predict the univariate representation, particularly over long horizons.

    Metadata

    Item Type: Monograph (Working Paper)
    Keyword(s) / Subject(s): predictive return regressions, variance ratio, fundamental and non-fundamental univariate representations
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Sarah Hall
    Date Deposited: 13 May 2014 13:18
    Last Modified: 07 Dec 2016 14:53
    URI: http://eprints.bbk.ac.uk/id/eprint/9727

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