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Efficient Tests of Stock Return Predictability

John Campbell () and Motohiro Yogo

No 10026, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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 dividend-price and smoothed earnings-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.

JEL-codes: C22 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ecm, nep-ets, nep-fin and nep-fmk
Date: 2003-10
Note: AP
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Published as Campbell, John Y. and Motohiro Yogo. "Efficient Tests Of Stock Return Predictability," Journal of Financial Economics, 2006, v81(1,Jul), 27-60.

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Journal Article: Efficient tests of stock return predictability (2006) Downloads
Working Paper: Efficient tests of stock return predictability (2006) Downloads
Working Paper: Efficient Tests of Stock Return Predictability (2002) Downloads
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