Maximal predictability under long-term mean reversion
Journal of Empirical Finance, 2018, vol. 45, issue C, 269-282
I analyse the relationship between two stylized empirical facts for stock returns: Unconditional long-term mean reversion and predictability by variables such as the dividend-price ratio or the short-term interest rate. In particular, I show that if one imposes that returns satisfy long-term mean reversion, this implies an upper bound on the predictive regression R-square. If a predictive regression is intended as a motivational building block for theoretical modelling, and the R-square bound is violated, one should recognize that the implied returns process violate long-term mean reversion. Empirical results show that the proposed bound is binding for several leading predictors.
Keywords: Return predictability; Variance ratios (search for similar items in EconPapers)
JEL-codes: C22 G1 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:45:y:2018:i:c:p:269-282
Access Statistics for this article
Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff
More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().