I examine an investor’s portfolio allocation problem across multiple risky assets in the presence of return predictability when, in addition to the predictability evidence, the investor uses conditional asset pricing models to guide him in the portfolio selection decision. I also explore how the uncertainty associated with the model dynamics affects the investor’s optimal portfolio. To analyze ...

Momentum strategies have historically delivered high Sharpe ratios and large positive alphas. However, returns to these strategies also display significant time-variation that is not very well understood. I show that expected momentum returns vary negatively and monotonically with the formation period return difference between past winners and losers, which I term the momentum gap. A one standa...

T paper makes indirect inference about the time variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, and there is no evidence that predictability has diminished in recent years. Semi-strong-form evidence suggests that time variation in expected returns...

This paper examines the forecasting ability of the dividend-price ratio for international stock market returns. Hitherto, existing research has only considered this issue in-sample and in a linear framework. Hence, this paper provides the first systematic study of non-linear forecasting within the present value model context. Using an asymmetric variant of the popular ESTR model we demonstrate ...

In the asset pricing literature, time-variation in market expected excess return tracked by financial ratios like dividend yield is typically attributed either to changing risk, related to the business cycle, or irrational mispricing. Extending the work on asset allocation and dividend yield by Kandel and Stambaugh (1996) to accommodate variation in risk as well as expected return, we develop B...

__________________________________________________________________________________ This paper makes indirect inference about the time-variation in expected stock returns by comparing unconditional sample variances to estimates of expected conditional variances. The evidence reveals more predictability as more information is used, and no evidence that predictability has diminished in recent year...

This paper evaluates the predictability of monthly stock return using out-of-sample (multi-step ahead and dynamic) prediction intervals. Past studies have exclusively used point forecasts, which are of limited value since they carry no information about the intrinsic predictive uncertainty associated. We compare empirical performances of alternative prediction intervals for stock return generat...

We extend theories and empirics in Chen, Hong and Stein (2002) by allowing investors subject to market sentiment to hold a biased belief in aggregate. With a dynamic multiple-asset model, we show that the ownership breadth-return relationship can be either positive or negative depending on the relative strength of two offsetting forces: (1) variation in disagreement and (2) variation in sentime...

I show that the dividend-price ratio predicts aggregate stock market returns with higher precision during recessions than in expansions, in a way that is both statistically and economically significant. This empirical evidence cannot be reconciled with three popular asset pricing approaches: habit-persistence (Campbell and Cochrane (1999)), long-run risk (Bansal and Yaron (2004)) and rare disas...

We establish several new findings on the relation between capital flow in commodity markets and asset returns. Capital flowing into commodity markets, as measured by high open-interest growth, predicts high commodity returns and low bond returns. Open-interest growth is a more powerful and robust predictor of commodity returns than other known predictors such as the short rate, the yield spread...