The scale of predictability
Federico M. Bandi,
Benoit Perron (),
Andrea Tamoni and
Claudio Tebaldi ()
No 509, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University
We view economic time series as the result of a cascade of shocks occurring at different times and different frequencies (scales). We suggest that economic relations that are found to be elusive when using raw data may hold true for different layers (details) in the cascade of economic shocks. This observation leads to a notion of a scale-specific predictability. Using direct extraction of the details and two-way aggregation, we provide strong evidence of risk compensations in market returns, as well as of an unusually clear link between macroeconomic uncertainty and uncertainty in financial markets, at frequencies lower than the business cycle. JEL classification: C22, E32, E44, G12, G17 Keywords: long run, predictability, aggregation, risk-return trade-off, Fisher hypothesis.
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Working Paper: The scale of predictability (2015)
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