The economic value of cross-predictability: A performance-based measure

Matteo Bagnara

No 424, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: Cross-predictability denotes the fact that some assets can predict other assets' returns. I propose a novel performance-based measure that disentangles the economic value of cross-predictability into two components: the predictive power of one asset's signal for other assets' returns (cross-predictive signals) and the amount of an asset's return explained by other assets' signals (cross-predicted returns). Empirically, the latter component dominates the former in the overall cross-prediction effects. In the crosssection, cross-predictability gravitates towards small firms that are strongly mispriced and difficult to arbitrage, while it becomes more difficult to cross-predict returns when market capitalization and book-to-market ratio rise.

Keywords: Empirical Asset Pricing; Portfolio Choice; Expected Returns; Cross-Predictability (search for similar items in EconPapers)
JEL-codes: C58 G11 G12 G14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:300646

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