TY - JOUR AU - Boudoukh,Jacob AU - Richardson,Matthew AU - Whitelaw,Robert TI - The Myth of Long-Horizon Predictability JF - National Bureau of Economic Research Working Paper Series VL - No. 11841 PY - 2005 Y2 - December 2005 UR - http://www.nber.org/papers/w11841 L1 - http://www.nber.org/papers/w11841.pdf N1 - Author contact info: Jacob Boudoukh The Caesarea Center Arison School of Business, IDC 3 Kanfei Nesharim St Herzlia 46150 ISRAEL Tel: 972/544-875727 E-Mail: jboudouk@idc.ac.il Matthew P. Richardson Stern School of Business New York University 44 West 4th Street, Suite 9-190 New York, NY 10012 Tel: 212/998-0349 Fax: 212/995-4233 E-Mail: mrichar0@stern.nyu.edu Robert F. Whitelaw New York University Stern School of Business 44 West 4th Street, Suite 9-190 New York, NY 10012-1126 Tel: 212/998-0338 Fax: 212/995-4233 E-Mail: rwhitela@stern.nyu.edu AB - 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. ER -