EconPapers    
Economics at your fingertips  
 

The scale of predictability

F.m Bandi, B Perron, Andrea Tamoni and C. Tebaldi

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: 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)
New Economics Papers: this item is included in nep-for
Date: 2018-10-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Published in Journal of Econometrics, 10, October, 2018, 208(1), pp. 120-140. ISSN: 0304-4076

Downloads: (external link)
http://eprints.lse.ac.uk/85646/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:85646

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().

 
Page updated 2019-08-15
Handle: RePEc:ehl:lserod:85646