The scale of predictability

F.m Bandi, Benoit 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)
Date: 2018-10-10
New Economics Papers: this item is included in nep-for
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Citations: View citations in EconPapers (5)

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

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

Related works:
Journal Article: The scale of predictability (2019)
Working Paper: The scale of predictability (2015)
Working Paper: The scale of predictability (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:85646

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