Simple Forecasts and Paradigm Shifts

Harrison Hong, Jeremy Stein and Jialin Yu

Journal of Finance, 2007, vol. 62, issue 3, 1207-1242

Abstract: We study the asset pricing implications of learning in an environment in which the true model of the world is a multivariate one, but agents update only over the class of simple univariate models. Thus, if a particular simple model does a poor job of forecasting over a period of time, it is discarded in favor of an alternative simple model. The theory yields a number of distinctive predictions for stock returns, generating forecastable variation in the magnitude of the value‐glamour return differential, in volatility, and in the skewness of returns. We validate several of these predictions empirically.

Date: 2007
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https://doi.org/10.1111/j.1540-6261.2007.01234.x

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Working Paper: Simple Forecasts and Paradigm Shifts (2003)
Working Paper: Simple Forecasts and Paradigm Shifts (2003)
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