Long Horizon Predictability: A Cautionary Tale
21 Pages Posted: 18 Mar 2018 Last revised: 2 Aug 2018
Date Written: March 17, 2018
Long-horizon return regressions have effectively small sample sizes. Using overlapping long-horizon returns provides only marginal benefit. Adjustments for overlapping observations have greatly overstated t-statistics. The evidence from regressions at multiple horizons is often misinterpreted. As a result, there is much less statistical evidence of long-horizon return predictability than implied by existing research, casting doubt over claims about forecasts based on stock market valuations and factor timing.
Keywords: Long Horizon Regressions, Predictability, T-Statistics, CAPE
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