Reconciling the return predictability evidence

• 成果类型: Article
• 署名作者: Lettau, Martin; Van Nieuwerburgh, Stijn
• 署名单位: New York University; Center for Economic & Policy Research (CEPR); National Bureau of Economic Research; Columbia University
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhm074
• 发表日期: 2008
• 页码: 1606
• 关键词: DIVIDEND YIELDS; equity premium; stock returns; time-series; regressions; consumption; RISK; models

摘要

Evidence of stock-return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This article shows that these seemingly incompatible results can be reconciled if the assumption of a fixed steady state mean of the economy is relaxed. We find strong empirical evidence in support of shifts in the steady state and propose simple methods to adjust financial ratios for such shifts. The in-sample forecasting relationship of adjusted price ratios and future returns is statistically significant and stable over time. In real time, however, changes in the steady state make the in-sample return forecastability hard to exploit out-of-sample. The uncertainty of estimating the size of steady-state shifts rather than the estimation of their dates is responsible for the difficulty of forecasting stock returns in real time. Our conclusions hold for a variety of financial ratios and are robust to changes in the econometric technique used to estimate shifts in the steady state.