Small Levels of Predictability and Large Economic Gains
41 Pages Posted: 12 May 2003
There are 2 versions of this paper
Small Levels of Predictability and Large Economic Gains
Date Written: March 2002
Abstract
Small-return predictability in the stock market has been widely documented in empirical studies, yet little has been written on its economic importance. This paper examines the issue through profitability on a trading strategy that utilizes small levels of predictability and analyzes the statistical distribution for returns achieved under such a strategy. Our results suggest that small-return predictability is economically significant in the sense that such trading strategies not only yield high returns but also are less risky under a fat tail distribution assumption. Quantitatively, we demonstrate that such a strategy could have doubled the market return for the period 1952 to 1998. We investigate reliability of our results through simulation and bootstrapping.
JEL Classification: C16, G10, G14
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Consumption, Aggregate Wealth and Expected Stock Returns
By Martin Lettau and Sydney C. Ludvigson
-
Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles
By Ravi Bansal and Amir Yaron
-
Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying
By Martin Lettau and Sydney C. Ludvigson
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Stock Return Predictability: Is it There?
By Geert Bekaert and Andrew Ang
-
Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia Wre Time-Varying
By Martin Lettau and Sydney C. Ludvigson