NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Predictive Regressions

Robert F. Stambaugh

NBER Technical Working Paper No. 240
Issued in May 1999

When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's finite-sample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under specifications that differ with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is specified as fixed or stochastic. The posteriors differ across such specifications asset allocations in the presence of estimation risk exhibit sensitivity to those differences.

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Document Object Identifier (DOI): 10.3386/t0240

Published: Journal of Financial Economics, Vol. 54 (1999): 375-421.

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