Journal of Financial and Quantitative Analysis Vol. 47 No. 5 2012
The Optimal Use of Return Predictability: An Empirical Study
Abstract
In this paper we study the economic value and statistical significance of asset return predictability, based on a wide range of commonly used predictive variables. We assess the performance of dynamic, unconditionally efficient strategies, first studied by Hansen and Richard (1987) and Ferson and Siegel (2001), using a test that has both an intuitive economic interpretation and known statistical properties. We find that using the lagged term spread, credit spread, and inflation significantly improves the risk-return trade-off. Our strategies consistently outperform efficient buy-and-hold strategies, both in and out of sample, and they also incur lower transactions costs than traditional conditionally efficient strategies.
- DOI
- 10.1017/s0022109012000415
- Volume
- 47
- Issue
- 5
- Pages
- 973-1001
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref