Asset Return Predictability in a Heterogeneous Agent Equilibrium Model

Murray Carlson (), David Chapman (), Ron Kaniel and Hong Yan
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Murray Carlson: Finance Division, Sauder School, University of British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T 1Z2, Canada

Quarterly Journal of Finance (QJF), 2015, vol. 05, issue 02, 1-45

Abstract: We use a general equilibrium model as a laboratory for generating predictable excess returns and for assessing the properties of the estimated consumption/portfolio rules, under both the empirical and the true dynamics of excess returns. The advantage of this approach, relative to the existing literature, is that the equilibrium model delineates the precise nature of the risk/return trade-off within an optimizing setting that endogenizes return predictability. In the experiments that we consider, the estimation issues are so severe that simple unconditional consumption and portfolio rules actually outperform (in a utility cost sense) both simple and bias-corrected empirical estimates of conditionally optimal policies.

Keywords: Return predictability; general equilibrium model; empirical experiments; optimal portfolio rules; relative utility cost (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Working Paper: Asset Return Predictability in a Heterogeneous Agent Equilibrium Model (2015)
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DOI: 10.1142/S201013921550010X

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