MAXIMIZING PREDICTABILITY IN THE STOCK AND BOND MARKETS

Andrew Lo () and A. Craig Mackinlay

Macroeconomic Dynamics, 1997, vol. 1, issue 1, 102-134

Abstract: We construct portfolios of stocks and bonds that are maximally predictable with respect to a set of ex-ante observable economic variables, and show that these levels of predictability are statistically significant, even after controlling for data-snooping biases. We disaggregate the sources of predictability by using several asset groups — sector portfolios, market-capitalization portfolios, and stock/bond/utility portfolios — and find that the sources of maximal predictability shift considerably across asset classes and sectors as the return horizon changes. Using three out-of-sample measures of predictability — forecast errors, Merton's market-timing measure, and the profitability of asset-allocation strategies based on maximizing predictability — we show that the predictability of the maximally predictable portfolio is genuine and economically significant.

Date: 1997
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Related works:
Working Paper: Maximizing Predictability in the Stock and Bond Markets (1995)
Working Paper: Maximizing predictability in the stock and bond markets (1992)
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:1:y:1997:i:01:p:102-134_00

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