Pockets of Predictability

Leland Farmer, Lawrence Schmidt and Allan Timmermann

Journal of Finance, 2023, vol. 78, issue 3, 1279-1341

Abstract: For many benchmark predictor variables, short‐horizon return predictability in the U.S. stock market is local in time as short periods with significant predictability (“pockets”) are interspersed with long periods with no return predictability. We document this result empirically using a flexible time‐varying parameter model that estimates predictive coefficients as a nonparametric function of time and explore possible explanations of this finding, including time‐varying risk premia for which we find limited support. Conversely, pockets of return predictability are consistent with a sticky expectations model in which investors slowly update their beliefs about a persistent component in the cash flow process.

Date: 2023
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Citations: View citations in EconPapers (9)

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https://doi.org/10.1111/jofi.13229

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Working Paper: Pockets of Predictability (2018)
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