Publication Type

Journal Article

Publication Date

4-2017

Abstract

Can the degree of predictability found in data be explained by existing asset pricing models? We provide two theoretical upper bounds on the R 2 of predictive regressions. Using data on the market portfolio and component portfolios, we find that the empirical R2 are significantly greater than the theoretical upper bounds. Our results suggest that the most promising direction for future research should aim to identify new state variables that are highly correlated with stock returns instead of seeking more elaborate stochastic discount factors.

Keywords

Return predictability, asset pricing, stochastic discount factor, habit formation, long-run risks, rare disaster

Discipline

Business | Finance and Financial Management

Research Areas

Finance

Publication

Journal of Financial and Quantitative Analysis

Volume

52

Issue

2

First Page

401

Last Page

425

ISSN

0022-1090

Identifier

10.1017/S0022109017000096

Publisher

Cambridge University Press

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1017/S0022109017000096

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