Break Risk

Maximum likelihood estimation of the equity premium

Simon C Smith, Allan Timmermann and Stijn Van Nieuwerburgh

The Review of Financial Studies, 2021, vol. 34, issue 4, 2045-2100

Abstract: We develop a new approach to modeling and predicting stock returns in the presence of breaks that simultaneously affect a large cross-section of stocks. Exploiting information in the cross-section enables us to detect breaks in return prediction models with little delay and to generate out-of-sample return forecasts that are significantly more accurate than those from existing approaches. To identify the economic sources of breaks, we explore the asset pricing restrictions implied by a present value model which links breaks in return predictability to breaks in the cash flow growth and discount rate processes.

JEL-codes: C11 C15 G10 (search for similar items in EconPapers)
Date: 2021
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