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http://ssrn.com/abstract=2184260
 
 

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The Scale of 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

August 13, 2015


Abstract:     
Stock return predictive relations found to be elusive when using raw data may hold true for different layers in the cascade of economic shocks. Consistent with this logic, we model stock market returns and their predictors as aggregates of uncorrelated components operating over different scales and introduce a notion of scale-specific predictability, i.e., predictability on the components. We formalize the theoretical link between predictability on the components and long-run predictability for the raw series. Empirically, we provide remarkably strong evidence of compensations for variance risk in stock market returns - as well as of an unusually clear link between macroeconomic uncertainty (as captured by consumption variance) and uncertainty in financial markets - at frequencies lower than the business cycle. The existence of low-frequency compensations for variance risk is justified in the context of a component-wise asset pricing model with Epstein-Zin recursive preferences.

Number of Pages in PDF File: 60

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

JEL Classification: C51, E32, G12, G17


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Date posted: December 5, 2012 ; Last revised: August 14, 2015

Suggested Citation

Bandi, Federico M. and Perron, Benoit and Tamoni, Andrea and Tebaldi, Claudio, The Scale of Predictability (August 13, 2015). 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)
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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