Student Faculty Macro Lunch - "Pockets of Predictability"

Presentation | April 30 | 12-1 p.m. | 639 Evans Hall

 Leland Farmer, Professor of Economics, University of Virginia Department of Economics

 Clausen Center

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.

  RSVP by emailing jgmendoza@berkeley.edu by April 26

 jgmendoza@berkeley.edu, 510-663-9044

 Pockets of Predictability