On the Predictability of Stock Returns: An Asset-Allocation Perspective

Shmuel Kandel and Robert Stambaugh

Journal of Finance, 1996, vol. 51, issue 2, 385-424

Abstract: Sample evidence about the predictability of monthly stock returns is considered from the perspective of a risk-averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression relation can seem weak when described by usual statistical measures but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability. Copyright 1996 by American Finance Association.

Date: 1996
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Working Paper: On the Predictability of Stock Returns: An Asset-Allocation Perspective (1995)
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