Year: 2007
Type: report
Abstract: The standard regression approach to modeling return predictability seems too restrictive in one way but too lax in another.A predictive regression models expected returns as an exact linear function of a given set of predictors but does not exploit the likely economic property that innovations in expected returns are negatively correlated with unexpected returns.We develop an alternative frameworka predictive system -that accommodates imperfect predictors and beliefs about that negative correlation.In this framework, the predictive ability of imperfect predictors is supplemented by information in lagged returns as well as lags of the predictors.Compared to predictive regressions, predictive systems deliver different and substantially more precise estimates of expected returns as well as different assessments of a given predictor's usefulness.
DOI: 10.3386/w12814
Authors: Lubos Pastor, Robert Stambaugh
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4301290084