The Decline in Asset Return Predictability and Macroeconomic Volatility

75 Pages Posted: 8 May 2017

See all articles by Alex Hsu

Alex Hsu

Georgia Institute of Technology - Scheller College of Business

Francisco Palomino

Board of Governors of the Federal Reserve System

Charles Qian

Citigroup

Date Written: May, 2017

Abstract

We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more persistent and less volatile shocks explain the lower predictability.

JEL Classification: E14, E44, G12, G18

Suggested Citation

Hsu, Alex and Palomino, Francisco and Qian, Charles, The Decline in Asset Return Predictability and Macroeconomic Volatility (May, 2017). FEDS Working Paper No. 2017-50, Available at SSRN: https://ssrn.com/abstract=2964441 or http://dx.doi.org/10.17016/FEDS.2017.050

Alex Hsu (Contact Author)

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
4043851123 (Phone)

Francisco Palomino

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Charles Qian

Citigroup ( email )

388 Greenwich Street
New York, NY 10013
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
215
Abstract Views
1,159
Rank
243,000
PlumX Metrics