Long Horizon Predictability: A Cautionary Tale

21 Pages Posted: 18 Mar 2018 Last revised: 2 Aug 2018

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Ronen Israel

AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

Date Written: March 17, 2018

Abstract

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

Suggested Citation

Boudoukh, Jacob and Israel, Ronen and Richardson, Matthew P., Long Horizon Predictability: A Cautionary Tale (March 17, 2018). Available at SSRN: https://ssrn.com/abstract=3142575 or http://dx.doi.org/10.2139/ssrn.3142575

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0349 (Phone)
212-995-4233 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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