Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets

48 Pages Posted: 28 Dec 2006 Last revised: 11 Nov 2022

See all articles by Geert Bekaert

Geert Bekaert

Columbia University - Columbia Business School, Finance

Robert J. Hodrick

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

Date Written: July 1991

Abstract

The paper characterizes predictable components in excess rates of returns on major equity and foreign exchange markets using lagged excess returns, dividend yields, and forward premiums as instruments. Vector autoregressive techniques demonstrate one-step-ahead predictability and provide implied long-horizon statistics. We estimate latent variable models as constrained counterparts to the VARs. The predictability of returns is related to asset pricing models by examining the volatility bounds on intertemporal marginal rates of substitution.

Suggested Citation

Bekaert, Geert and Hodrick, Robert J., Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets (July 1991). NBER Working Paper No. w3790, Available at SSRN: https://ssrn.com/abstract=473945

Geert Bekaert (Contact Author)

Columbia University - Columbia Business School, Finance ( email )

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Robert J. Hodrick

Columbia University - Columbia Business School, Finance ( email )

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National Bureau of Economic Research (NBER)

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