The Scale of Predictability
Federico M. Bandi
University of Chicago - Booth School of Business
University of Montreal - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - Center for Interuniversity Research in Econometrics
London School of Economics & Political Science (LSE)
Bocconi University, IGIER and CAREFIN
May 9, 2015
We view economic time series as the result of a cascade of shocks occurring at different times and different frequencies (scales). We suggest that economic relations that are found to be elusive when using raw data may hold true for different layers (details) in the cascade of economic shocks. This observation leads to a notion of a scale-specific predictability. Using direct extraction of the details and two-way aggregation, we provide strong evidence of risk compensations in market returns, as well as of an unusually clear link between macroeconomic uncertainty and uncertainty in financial markets, at frequencies lower than the business cycle.
Number of Pages in PDF File: 60
Keywords: long run, predictability, aggregation, risk-return trade-off, Fisher hypothesis
JEL Classification: C51, E32, G12, G17
Date posted: December 5, 2012 ; Last revised: May 9, 2015
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