Journal of Financial and Quantitative Analysis Vol. 60 No. 1 2025
Predictability Puzzles
open access
Abstract
Dynamic equilibrium models based on present value computation not only imply that returns are predictable but also generate particular short-term patterns of predictability in asset returns. I take advantage of this to construct a set of tests of equilibrium generated predictability (EGP). I apply the tests to document two puzzles: First, option-implied or realized measures of volatility ought to predict returns but do not; and second, the variance risk premium (VRP) predicts returns but only at long horizons. VRP fails the tests of EGP as the term structure of predictable variation is inconsistent with an equilibrium interpretation.
- DOI
- 10.1017/s0022109024000218
- Volume
- 60
- Issue
- 1
- Pages
- 482-523
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref