NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Efficient Tests of Stock Return Predictability

John Y. Campbell, Motohiro Yogo

NBER Working Paper No. 10026
Issued in October 2003
NBER Program(s):   AP

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.

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A data appendix is available at http://www.nber.org/data-appendix/w10026

This paper was revised on August 25, 2009

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Document Object Identifier (DOI): 10.3386/w10026

Published: Campbell, John Y. and Motohiro Yogo. "Efficient Tests Of Stock Return Predictability," Journal of Financial Economics, 2006, v81(1,Jul), 27-60. citation courtesy of

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