The scale of predictability
Andrea Tamoni and
LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library
We introduce a new stylized fact: the hump-shaped behavior of slopes and coefficients of determination as a function of the aggregation horizon when running (forward/backward) predictive regressions of future excess market returns onto past economic uncertainty (as proxied by market variance, consumption variance, or economic policy uncertainty). To justify this finding formally, we propose a novel modeling framework in which predictability is specified as a property of low-frequency components of both excess market returns and economic uncertainty. We dub this property scale-specific predictability. We show that classical predictive systems imply restricted forms of scale-specific predictability. We conclude that for certain predictors, like economic uncertainty, the restrictions imposed by classical predictive systems may be excessively strong.
Keywords: long run; predictability; aggregation; risk-return trade-off (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
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Published in Journal of Econometrics, 10, October, 2018, 208(1), pp. 120-140. ISSN: 0304-4076
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:85646
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