Pockets of Predictability

Allan Timmermann, Leland Farmer and Lawrence Schmidt

No 12885, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Return predictability in the U.S. stock market is local in time as short periods with significant predictability (`pockets') are interspersed with long periods with little or no evidence of return predictability. We document this empirically using a flexible non-parametric approach and explore possible explanations of this finding, including time-varying risk premia. We find that short-lived predictability pockets are inconsistent with a broad class of affine asset pricing models. Conversely, pockets of return predictability are more in line with a model with investors' incomplete learning about a highly persistent growth component in the underlying cash flow process which undergoes occasional regime shifts.

Keywords: Predictability of stock returns; Incomplete learning; Markov switching predictive systems; Cash flows; Affine asset pricing models (search for similar items in EconPapers)
Date: 2018-04
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Citations: View citations in EconPapers (17)

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Journal Article: Pockets of Predictability (2023)
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