NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets

Geert Bekaert, Robert J. Hodrick

NBER Working Paper No. 3790 (Also Reprint No. r1745)
Issued in July 1991
NBER Program(s):   ITI   ME   IFM

The paper characterizes predictable components in excess rates of returns on major equity and foreign exchange markets using lagged excess returns, dividend yields, and forward premiums as instruments. Vector autoregressive techniques demonstrate one-step-ahead predictability and provide implied long-horizon statistics. We estimate latent variable models as constrained counterparts to the VARs. The predictability of returns is related to asset pricing models by examining the volatility bounds on intertemporal marginal rates of substitution.

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Document Object Identifier (DOI): 10.3386/w3790

Published: Journal of Finance, Vol. 47, No. 2 (June 1992): 467-509. citation courtesy of

 
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