Predictive Systems: Living with Imperfect Predictors

Lubos Pastor and Robert Stambaugh

Journal of Finance, 2009, vol. 64, issue 4, 1583-1628

Abstract: We develop a framework for estimating expected returns—a predictive system—that allows predictors to be imperfectly correlated with the conditional expected return. When predictors are imperfect, the estimated expected return depends on past returns in a manner that hinges on the correlation between unexpected returns and innovations in expected returns. We find empirically that prior beliefs about this correlation, which is most likely negative, substantially affect estimates of expected returns as well as various inferences about predictability, including assessments of a predictor's usefulness. Compared to standard predictive regressions, predictive systems deliver different expected returns with higher estimated precision.

Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (142)

Downloads: (external link)
https://doi.org/10.1111/j.1540-6261.2009.01474.x

Related works:
Working Paper: Predictive Systems: Living with Imperfect Predictors (2008)
Working Paper: Predictive Systems: Living with Imperfect Predictors (2007)
Working Paper: Predictive Systems: Living with Imperfect Predictors (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:64:y:2009:i:4:p:1583-1628

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().