NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

On the Predictability of Stock Returns: An Asset-Allocation Perspective

Shmuel Kandel, Robert F. Stambaugh

NBER Working Paper No. 4997
Issued in January 1995
NBER Program(s):   AP

The predictability of monthly stock returns is investigated from the perspective of a risk-averse investor who uses the data to update initially vague beliefs about the conditional distribution of returns. The optimal stocks-versus-cash allocation of the investor can depend importantly on the current value of a predictive variable, such as dividend yield, even though a null hypothesis of no predictability might not be rejected at conventional significance levels. When viewed in this economic context, the empirical evidence indicates a strong degree of predictability in monthly stock returns.

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Document Object Identifier (DOI): 10.3386/w4997

Published: Journal of Finance 51 (1996):385-424.

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