U.S. stock portfolios sorted on size, momentum, transaction costs, M/B, I/A and ROA ratios, and industry classification show considerable levels and variation of return predictability, inconsistent with asset pricing models. This means that a predictable risk premium is not equal to compensation for systematic risk as implied by asset pricing theory (Kirby 1998). We show that introducing market...

We model consumption and dividend growth as di¤erent processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better a...

We develop tests for predictability that are robust to both the magnitude of initial condition and degree persistence predictor. While popular Bonferroni Q test Campbell Yogo (2006) displays excellent power properties strongly persistent predictors with an asymptotically negligible condition, it can suffer from severe size distortions losses when either is non-negligible or predictor weakly per...

We develop easy-to-implement tests for return predictability which, relative to extant in the literature, display attractive finite sample size control and power across a wide range of persistence endogeneity levels predictor. Our approach is based on standard regression t-ratio variant where predictor quasi-GLS (rather than OLS) demeaned. In strongly persistent near-unit root environment, limi...

We use a consumption based asset pricing model to show that the predictability of excess returns on risky assets can arise from only two sources: (1) stochastic volatility fundamental variables, or (2) departures rational expectations give rise predictable investor forecast errors and market inefficiency. While controlling for volatility, we find variable which measures non-fundamental noise in...