A reexamination of stock return predictability

Yongok Choi, Stefan Jacewitz and Joon Y. Park

Journal of Econometrics, 2016, vol. 192, issue 1, 168-189

Abstract: We provide a simple and innovative approach to test for predictability in stock returns. Our approach consists of two methodologies, time change and instrumental variable estimation, which are employed respectively to deal effectively with persistent stochastic volatility in stock returns and endogenous nonstationarity in their predictors. These are prominent characteristics of the data used in predictive regressions, which are known to have a substantial impact on the test of predictability, if not properly taken care of. Our test finds no evidence supporting stock return predictability, at least if we use the common predictive ratios such as dividend–price and earnings–price ratios.

Keywords: Predictive regression; Time change; Cauchy estimator; Nonstationarity; Stochastic volatility (search for similar items in EconPapers)
JEL-codes: C13 C22 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:192:y:2016:i:1:p:168-189

DOI: 10.1016/j.jeconom.2015.02.048

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