Journal
JOURNAL OF ECONOMETRICS
Volume 192, Issue 1, Pages 168-189Publisher
ELSEVIER SCIENCE SA
DOI: 10.1016/j.jeconom.2015.02.048
Keywords
Predictive regression; Time change; Cauchy estimator; Nonstationarity.; Stochastic volatility
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We provide a simple and innovative approach to test for predictability in stock returns. Our approach consists of two methodologies, time change and instrumental variable estimation, which are employed respectively to deal effectively with persistent stochastic volatility in stock returns and endogenous nonstationarity in their predictors. These are prominent characteristics of the data used in predictive regressions, which are known to have a substantial impact on the test of predictability, if not properly taken care of. Our test finds no evidence supporting stock return predictability, at least if we use the common predictive ratios such as dividend-price and earnings-price ratios. (C) 2016 Elsevier B.V. All rights reserved.
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