Efficient Tests of Stock Return Predictability
NBER Working Paper No. 10026
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.
Supplementary materials for this paper:
This paper was revised on August 25, 2009
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
Users who downloaded this paper also downloaded* these: