Measuring the Predictable Variation in Stock and Bond Returns

Chris Kirby

The Review of Financial Studies, 1997, vol. 10, issue 3, 579-630

Abstract: Recent studies show that when a regression model is used to forecast stock and bond returns, the sample R [superscript 2] increases dramatically with the length of the return horizon. These studies argue, therefore, that long-horizon returns are highly predictable. This article presents evidence that suggests otherwise. Long-horizon regressions can easily yield large values of the sample R [superscript 2], even if the population R [superscript 2] is small or zero. Moreover, long-horizon regressions with a small or zero population R [superscript 2] can produce t-ratios that might be interpreted as evidence of strong predictability. In general, the analysis provides little support for the view that long-horizon returns are highly predictable. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.

Date: 1997
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