Efficient tests of stock return predictability
John Campbell () and
Scholarly Articles from Harvard University Department of Economics
Conventional tests of the predictability of stock returns could be invalid, that is reject the null too frequently, when the predictor variable is persistent and its innovations are highly correlated with returns. We develop a pretest to determine whether the conventional t-test leads to invalid inference and an efficient test of predictability that corrects this problem. Although the conventional t-test is invalid for the dividendâ€“price and smoothed earningsâ€“price ratios, our test finds evidence for predictability. We also find evidence for predictability with the short rate and the long-short yield spread, for which the conventional t-test leads to valid inference.
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Published in Journal of Financial Economics
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Journal Article: Efficient tests of stock return predictability (2006)
Working Paper: Efficient Tests of Stock Return Predictability (2003)
Working Paper: Efficient Tests of Stock Return Predictability (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3122601
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