Abstract

http://ssrn.com/abstract=2184260
 


 



Economic Uncertainty and Predictability


Federico M. Bandi


University of Chicago - Booth School of Business

Benoit Perron


University of Montreal - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO); University of Montreal - Center for Interuniversity Research in Econometrics

Andrea Tamoni


London School of Economics & Political Science (LSE)

Claudio Tebaldi


Bocconi University, IGIER and CAREFIN

February 25, 2016


Abstract:     
We introduce a new stylized fact: the hump-shaped behavior of slopes and coefficients of determination as a function of the aggregation horizon when running (forward/backward) predictive regressions of future excess market returns onto past economic uncertainty. To justify this finding formally, we propose a novel framework in which predictability is a property of low-frequency components of both excess market returns and economic uncertainty. We show that predictability on these low-frequency components (i.e., scale-specific predictability) translates theoretically into hump-shaped patterns of slopes and coefficients of determination upon forward/backward regressions on the raw series. If past long-run uncertainty predicts future long-run returns, it also has to predict future long-run dividend growth. We report that it does so strongly.

Number of Pages in PDF File: 78

Keywords: long run, predictability, aggregation, risk-return trade-off

JEL Classification: C51, E32, G12, G17


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Date posted: December 5, 2012 ; Last revised: February 29, 2016

Suggested Citation

Bandi, Federico M. and Perron, Benoit and Tamoni, Andrea and Tebaldi, Claudio, Economic Uncertainty and Predictability (February 25, 2016). Available at SSRN: http://ssrn.com/abstract=2184260 or http://dx.doi.org/10.2139/ssrn.2184260

Contact Information

Federico Maria Bandi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4352 (Phone)

Chicago Booth School of Business Logo

Benoit Perron
University of Montreal - Department of Economics ( email )
C.P. 6128, succursale Centre-Ville
Montreal, Quebec H3C 3J7
Canada
514-343-2126 (Phone)
514-343-5831 (Fax)
Center for Interuniversity Research and Analysis on Organization (CIRANO) ( email )
2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada
University of Montreal - Center for Interuniversity Research in Econometrics ( email )
C.P. 6128, Succursale Centre-ville
Montreal, Quebec H3C 3J7
Canada
Andrea Tamoni (Contact Author)
London School of Economics & Political Science (LSE) ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
02079557303 (Phone)
Claudio Tebaldi
Bocconi University, IGIER and CAREFIN ( email )
Via Roentgen 1
Milan, 20136
Italy

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