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The Horizon Effect of Stock Return Predictability and Model Uncertainty on Portfolio Choice: UK Evidence

Guangjie Li

No E2009/4, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We study how stock return's predictability and model uncertainty affect a rational buy-and-hold investor.s decision to allocate her wealth for different lengths of investment horizons in the UK market. We consider the FTSE All-Share Index as the risky asset, and the UK Treasury bill as the risk free asset in forming the investor's portfolio. We identify the most powerful predictors of the stock return by accounting for model uncertainty. We find that though stock return predictability is weak, it can still affect the investor's optimal portfolio decision over different investment horizons.

Keywords: stock return predictability; portfolio choice; Bayesian Model Averaging; SUR model (search for similar items in EconPapers)
JEL-codes: C11 G11 G15 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2009-03, Revised 2009-08
New Economics Papers: this item is included in nep-fmk and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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