Abstract

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Efficient Tests of Stock Return Predictability


John Y. Campbell


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Motohiro Yogo


Federal Reserve Bank of Minneapolis

September 20, 2005

Journal of Financial Economics (JFE), Vol. 81, No. 1, 2006

Abstract:     
Conventional tests of the predictability of stock returns could be invalid, that is reject the null too frequently, when the predictor variable is persistent and its innovations are highly correlated with returns. We develop a pretest to determine whether the conventional t-test leads to invalid inference and an efficient test of predictability that corrects this problem. Although the conventional t-test is invalid for the dividend-price and smoothed earnings-price ratios, our test finds evidence for predictability. We also find evidence for predictability with the short rate and the long-short yield spread, for which the conventional t-test leads to valid inference.

Number of Pages in PDF File: 56

Keywords: Bonferroni test, Dividend yield, Predictability, Stock returns, Unit root

JEL Classification: C12, C22, G1

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Date posted: October 23, 2002 ; Last revised: June 17, 2009

Suggested Citation

Campbell, John Y. and Yogo, Motohiro, Efficient Tests of Stock Return Predictability (September 20, 2005). Journal of Financial Economics (JFE), Vol. 81, No. 1, 2006. Available at SSRN: http://ssrn.com/abstract=343782 or http://dx.doi.org/10.2139/ssrn.343782

Contact Information

John Y. Campbell
Harvard University - Department of Economics ( email )
Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)
HOME PAGE: http://scholar.harvard.edu/campbell
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Motohiro Yogo (Contact Author)
Federal Reserve Bank of Minneapolis ( email )
90 Hennepin Avenue
Minneapolis, MN 55401-1804
United States
HOME PAGE: http://sites.google.com/site/motohiroyogo/
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