Articlehybrid1999

Predictive regressions

1,614 citations0/0 files storedJournal of Financial Economics

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Financial Markets and Investment Strategies Forecasting Techniques and Applications Financial Risk and Volatility Modeling

Abstract

When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's finite-sample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under specifications that differ with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is specified as fixed or stochastic. The posteriors differ across such specifications, and asset allocations in the presence of estimation risk exhibit sensitivity to those differences.

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References

1988Dividend yields and expected stock returns 1977Asset returns and inflation 1985Stock Returns and the Term Structure 1984Forward and spot exchange rates 1986Predicting returns in the stock and bond markets 1987The Information in Long-Maturity Forward Rates 2004Exchange Rates and Fundamentals 1983Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates

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