Measuring the Predictable Variation in Stock and Bond Returns
Review of Financial Studies
1997
Recent studies show that when a regression model is used to forecast stock and bond returns, the sample R^2 increases dramatically with the length of the return horizon. These studies argue, therefore, that long-horizon returns are highly predictable. This article presents evidence that suggests otherwise. Long-horizon regressions can easily yield large values of the sample R^2, even if the populations R^2 is smaller or zero. Moreover, long-horizon regressions with a small or zero population R^2 can produce t-ratios that might be interpreted as evidence of strong predictability. In general, the analysis provides little support for the view that long-horizon returns are highly predictable.
- DOI
- 10.1093/rfs/10.3.579
- Volume
- 10 (3)
- Pages
- 579-630
- Language
- en
- Export
- BibTeX
- Sources
- crossref openalex