Arrowstreet Capital, L.P.
NBER Working Papers and Publications
|July 2005||Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?|
with John Y. Campbell: w11468
A number of variables are correlated with subsequent returns on the aggregate US stock market in the 20th Century. Some of these variables are stock market valuation ratios, others reflect patterns in corporate finance or the levels of short- and long-term interest rates. Amit Goyal and Ivo Welch (2004) have argued that in-sample correlations conceal a systematic failure of these variables out of sample: None are able to beat a simple forecast based on the historical average stock return. In this note we show that forecasting variables with significant forecasting power in-sample generally have a better out-of-sample performance than a forecast based on the historical average return, once sensible restrictions are imposed on the
signs of coefficients and return forecasts. The out-of-s...
Published: Campbell, John Y. and Samuel B. Thompson. "Predicting Excess Stock Returns Out of Sample: Can anything Beat the Historical Average?" Review of Financial Studies 21 (July 2008): 1509-1531.
|August 2004||Volatility Comovement: A Multifrequency Approach|
with Laurent E. Calvet, Adlai J. Fisher: t0300
We implement a multifrequency volatility decomposition of three exchange rates and show that components with similar durations are strongly correlated across series. This motivates a bivariate extension of the Markov-Switching Multifractal (MSM) introduced in Calvet and Fisher (2001, 2004). Bivariate MSM is a stochastic volatility model with a closed-form likelihood. Estimation can proceed by ML for state spaces of moderate size, and by simulated likelihood via a particle filter in high-dimensional cases. We estimate the model and confirm its main assumptions in likelihood ratio tests. Bivariate MSM compares favorably to a standard multivariate GARCH both in- and out-of-sample. We extend the model to multivariate settings with a potentially large number of assets by proposing a parsimoniou...
Published: Calvet, Laurent E., Adlai J. Fisher and Samuel B. Thompson. "Volatility Comovement: A Multifrequency Approach," Journal of Econometrics, 2006, v131(1-2,Mar-Apr), 179-215.
|April 2004||New Forecasts of the Equity Premium|
with Christopher Polk, Tuomo Vuolteenaho: w10406
If investors are myopic mean-variance optimizers, a stock's expected return is linearly related to its beta in the cross section. The slope of the relation is the cross-sectional price of risk, which should equal the expected equity premium. We use this simple observation to forecast the equity-premium time series with the cross-sectional price of risk. We also introduce novel statistical methods for testing stock-return predictability based on endogenous variables whose shocks are potentially correlated with return shocks. Our empirical tests show that the cross-sectional price of risk (1) is strongly correlated with the market's yield measures and (2) predicts equity-premium realizations especially in the first half of our 1927-2002 sample.
Published: Polk, Christopher, Samuel Thompson and Tuojmo Vuolteenaho. "Cross-Sectional Forecasts Of The Equity Premium," Journal of Financial Economics, 2006, v81(1,Jul), 101-147.