Upper Bounds on Return Predictability
نویسندگان
چکیده
This paper investigates whether the degree of predictability can be explained by existing asset pricing models, and provides two theoretical upper bounds on the R-square of the regression of stock returns on predictors for given classes of models of interest. Empirically, we find that the predictive R-square is significantly larger than the upper bounds permitted by well known asset pricing models. Our findings suggest new asset pricing models are needed to have state variables highly correlated with stock returns. JEL Classification: C22, C53, C58, G10, G12, G14, G17
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