Payout yield, risk, and mispricing: A Bayesian analysis

Jay Shanken () and Ane Tamayo

Journal of Financial Economics, 2012, vol. 105, issue 1, 131-152

Abstract: We develop a simple parametric model in which hypotheses about predictability, mispricing, and the risk-return tradeoff can be evaluated simultaneously, while allowing for time variation in both risk and expected return. Most of the return predictability based on aggregate payout yield is unrelated to market risk. We consider a range of Bayesian prior beliefs about the risk-return tradeoff and the extent to which predictability is driven by mispricing. The impact of these beliefs on an investor's certainty-equivalent return when choosing between a market index and riskless T-bills is economically significant, in both ex ante and out-of-sample analyses.

Keywords: Predictability; Time-varying risk; Mispricing; Bayesian (search for similar items in EconPapers)
JEL-codes: C11 G11 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:105:y:2012:i:1:p:131-152

DOI: 10.1016/j.jfineco.2011.12.002

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