 Stock Return Predictability: comparing Macro- and Micro-ApproachesWorking papers from Banque de France Abstract: Economic theory identifies two potential sources of return predictability: time variation in expected returns (beta-predictability) or market inefficiencies (alpha-predictability). For the latter, Samuelson argued that macro-returns exhibit more inefficiencies than micro-returns, as individual stories are averaged out, leaving only harder-to-eliminate macro-mispricing at the index-level. To evaluate this claim, we compare macro- and micro-predictability on US data to gauge if the former turns out higher than the latter. Additionally, we extend over time the methodology of Rapach et al. (2011) to disentangle the two sources of predictability. We first find that Samuelson's view appears incorrect, as micro-predictability is not structurally lower than macro-predictability. Second, we find that our estimated alpha- and betapredictability indices are coherent with their corresponding theoretical implications (the alpha-predictability being high in times of bullish markets, and the beta-predictability in recessive periods), thus suggesting that the two mechanisms are at play in our dataset. Keywords: Out-of-Sample Return Predictability; Efficient Market Hypothesis; Conditional Beta Pricing Model; Alpha Predictability (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:891 Access Statistics for this paper More papers in Working papers from Banque de France Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS. Contact information at EDIRC. |
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