Presentation | April 30 | 12-1 p.m. | 639 Evans Hall
Abstract: For many benchmark predictor variables, short-horizon return predictability in the U.S.
stock market is local in time as short periods with significant predictability (pockets) are
interspersed with long periods with little or no evidence of return predictability. We document
this result empirically using a flexible time-varying parameter model which estimates predictive
coefficients as a nonparametric function of time and explore possible explanations of this finding,
including time-varying risk-premia for which we only find limited support. Conversely, pockets
of return predictability are consistent with a model of incomplete learning in which boundedly
rational investors use macroeconomic proxies to track movements in a highly persistent growth
component in the underlying cash flow process and fail to incorporate effects of future revisions
in beliefs into current prices.
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