80 Pages Posted: 10 Oct 1998 Last revised: 11 Apr 2010
This article studies predictability in U.S. stock returns for multiple investment horizons. We measure to what extent predictability is driven by premiums for economy-wide risk factors, comparing two standard methods for factor selection. We study single-beta models and multiple-beta models. We show how to estimate the fraction of the predictability in returns captured by the model, simultaneously with the other parameters. Our analysis indicates that the models capture a large fraction of the predictability for all of the investment horizons. The performances of the principal components and the prespecified-factor approaches are broadly similar.
JEL Classification: G13
Suggested Citation: Suggested Citation
Ferson, Wayne E. and Korajczyk, Robert A., Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?. Journal of Business, Vol. 68, No. 3, July 1995. Available at SSRN: https://ssrn.com/abstract=6320