Time-Varying Short-Horizon Return Predictability
45 Pages Posted: 6 Mar 2008 Last revised: 31 Jan 2011
Date Written: January 24, 2010
In the G7 countries, the short-horizon performance of aggregate return predictors such as the dividend yield and the short rate appears nonexistent during business cycle expansions but sizable during contractions. This phenomenon appears related to countercyclical risk premiums as well as the time-variation in the dynamics of predictors. Our empirical model outperforms the historical average out-of-sample in the US, but the results throughout the G7 are mixed.
Keywords: Stock Return Predictability, Asset Pricing, Business Fluctuations, Financial Markets and the Macro economy
JEL Classification: E32, E44, G11, G12
Suggested Citation: Suggested Citation