What Drives Market Return Predictability?

39 Pages Posted: 1 May 2013 Last revised: 21 May 2013

See all articles by Quan Wen

Quan Wen

Georgetown University - Department of Finance

Dexin Zhou

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Date Written: May 1, 2013

Abstract

Market return predictability may be driven by time varying discount rates or changing beliefs of cash flow. We use analyst earnings forecast to separate cash flow and discount rate components of returns and distinguish the source of return predictability by a set of predictive variables commonly used in the literature. The overall evidence is consistent with the idea that the predictive variables capture time varying discount rates. Some variables also predict cash flow component of returns, implying that these predictive variables may capture investors' biases in projecting aggregate future cash flows.

Keywords: predictability, risk premium, analyst

Suggested Citation

Wen, Quan and Zhou, Dexin, What Drives Market Return Predictability? (May 1, 2013). Available at SSRN: https://ssrn.com/abstract=2258563 or http://dx.doi.org/10.2139/ssrn.2258563

Quan Wen

Georgetown University - Department of Finance ( email )

37th and O Street, NW
Washington D.C., DC 20057
United States

HOME PAGE: http://faculty.georgetown.edu/qw50

Dexin Zhou (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

55 Lexington Avenue
New York, NY 10010
United States

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