On the Predictability of Stock Returns: An Asset- Allocation Perspective

Posted: 31 Aug 1995

See all articles by Shmuel Kandel (deceased)

Shmuel Kandel (deceased)

Deceased

Robert F. Stambaugh

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

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Abstract

Sample evidence about the predictability of monthly stock returns is considered from the perspective of an investor allocating funds between stocks and cash. A regression of stock returns on a set of predictive variables might seem weak when described by usual statistical measures, but such measures can fail to convey the economic significance of the sample evidence when it is used by a risk-averse Bayesian investor to update prior beliefs about the regression relation and to compute an optimal asset allocation. Even when those prior beliefs are weighted substantially against predictability, the current values of the predictive variables can exert a strong influence on the portfolio decision.

JEL Classification: D89

Suggested Citation

Kandel (deceased), Shmuel and Stambaugh, Robert F., On the Predictability of Stock Returns: An Asset- Allocation Perspective. Available at SSRN: https://ssrn.com/abstract=6654

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

The Wharton School, Finance Department
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United States
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National Bureau of Economic Research (NBER)

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