Department of Research and Statistics
Board of Governors of the Federal Reserve
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NBER Working Papers and Publications
|August 2011||What is the Chance that the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio|
with Jessica A. Wachter: w17334
We examine the evidence on excess stock return predictability in a Bayesian setting in which the investor faces uncertainty about both the existence and strength of predictability. When we apply our methods to the dividend-price ratio, we find that even investors who are quite skeptical about the existence of predictability sharply modify their views in favor of predictability when confronted by the historical time series of returns and predictor variables. Correctly taking into account the stochastic properties of the regressor has a dramatic impact on inference, particularly over the 2000-2005 period.
What is the chance that the equity premium varies over time? Evidence from regressions on the dividend-price ratio, with Missaka Warusawitharana, forthcoming, Journal of Econometrics. citation courtesy of
|June 2007||Predictable Returns and Asset Allocation: Should a Skeptical Investor Time the Market?|
with Jessica A. Wachter: w13165
Are excess returns predictable and if so, what does this mean for investors? Previous literature has tended toward two polar viewpoints: that predictability is useful only if the statistical evidence for it is incontrovertible, or that predictability should affect portfolio choice, even if the evidence is weak according to conventional measures. This paper models an intermediate view: that both data and theory are useful for decision-making. We investigate optimal portfolio choice for an investor who is skeptical about the amount of predictability in the data. Skepticism is modeled as an informative prior over the R^2 of the predictive regression. We find that the evidence is sufficient to convince even an investor with a highly skeptical prior to vary his portfolio on the basis of th...
Published: Wachter, Jessica A. & Warusawitharana, Missaka, 2009. "Predictable returns and asset allocation: Should a skeptical investor time the market?," Journal of Econometrics, Elsevier, vol. 148(2), pages 162-178, February. citation courtesy of