A note on the economics and statistics of predictability: A long run risks perspective

The Wharton School, University of Pennsylvania; The Wharton School, University of Pennsylvania and NBER

ABSTRACT Asset return and cash flow predictability is of considerable interest in financial economics. In this note, we show that the magnitude of this predictability in the data is quite small and is consistent with the implications of the long-run risks model.

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    ABSTRACT: This note reinterprets methods that seek to use the aggregate dividend price ratio to predict aggregate stock market returns; specifically, methods which use information about time-varying changes in the dividend-price ratio process to improve the prediction equation. It argues that the empirical evidence is still too weak to suggest practical usefulness of these estimators.
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    ABSTRACT: Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
    Journal of Political Economy 01/1999; 107(2):205-251. · 2.90 Impact Factor
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    ABSTRACT: This paper develops a class of recursive, but not necessarily expected utility, preferences over intertemporal consumption lotteries. An important feature of these general preferences is that they permit risk attitudes to be disentangled from the degree of intertemporal substitutability. Moreover, in an infinite horizon, representative-agent context, these preference specifications lead to a model of asset returns in which appropriate versions of both the atemporal CAPM and the intertemporal consumption CAPM are nested as special cases. In the authors' general model, systematic risk of an asset is determined by covariance with both the return to the market portfolio and consumption growth. Copyright 1989 by The Econometric Society.
    Econometrica 02/1989; 57(4):937-69. · 3.82 Impact Factor


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