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

J. OF FINANCE, Vol. 51 No. 2, June 1996

Posted: 11 Sep 1996

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 a risk-averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression elation can seem weak when described by usual statistical measures, but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability.

JEL Classification: C11, G19

Suggested Citation

Kandel (deceased), Shmuel and Stambaugh, Robert F., On the Predictability of Stock Returns: An Asset-Allocation Perspective. J. OF FINANCE, Vol. 51 No. 2, June 1996. Available at SSRN: https://ssrn.com/abstract=7723

Robert F. Stambaugh (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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

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