NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Myth of Long-Horizon Predictability

Jacob Boudoukh, Matthew Richardson, Robert Whitelaw

NBER Working Paper No. 11841
Issued in December 2005
NBER Program(s):Asset Pricing

The prevailing view in finance is that the evidence for long-horizon stock return predictability is significantly stronger than that for short horizons. We show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability. For example, for the persistence levels of dividend yields, the analytical correlation is 99% between the 1- and 2-year horizon estimators and 94% between the 1- and 5-year horizons, due to the combined effects of overlapping returns and the persistence of the predictive variable. Common sampling error across equations leads to ordinary least squares coefficient estimates and R2s that are roughly proportional to the horizon under the null hypothesis. This is the precise pattern found in the data. The asymptotic theory is corroborated, and the analysis extended by extensive simulation evidence. We perform joint tests across horizons for a variety of explanatory variables, and provide an alternative view of the existing evidence.

download in pdf format
   (341 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11841

Published: Boudoukh, Jacob, Matthew Richardson, and Robert F. Whitelaw. "The Myth of Long-Horizon Predictability." Review of Financial Studies 21, 4 (July 2008): 1576-1605.

Users who downloaded this paper also downloaded* these:
Ang and Bekaert w8207 Stock Return Predictability: Is it There?
Lettau and Van Nieuwerburgh w12109 Reconciling the Return Predictability Evidence
Boudoukh, Michaely, Richardson, and Roberts w10651 On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing
Ferson, Heuson, and Su w11021 Weak and Semi-Strong Form Stock Return Predictability Revisited
Goyal and Welch w10483 A Comprehensive Look at the Empirical Performance of Equity Premium Prediction
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us