On the Predictability of Stock Returns: An Asset-Allocation Perspective
41 Pages Posted: 20 Jul 2000 Last revised: 30 Aug 2010
Date Written: January 1995
The predictability of monthly stock returns is investigated from the perspective of a risk-averse investor who uses the data to update initially vague beliefs about the conditional distribution of returns. The optimal stocks-versus-cash allocation of the investor can depend importantly on the current value of a predictive variable, such as dividend yield, even though a null hypothesis of no predictability might not be rejected at conventional significance levels. When viewed in this economic context, the empirical evidence indicates a strong degree of predictability in monthly stock returns.
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