On the Predictability of Stock Returns: An Asset‐Allocation Perspective

  • Author(s): SHMUEL KANDEL, ROBERT F. STAMBAUGH
  • Published: Apr 30, 2012
  • Pages: 385-424
  • DOI: 10.1111/j.1540-6261.1996.tb02689.x

ABSTRACT

Sample evidence about the predictability of monthly stock returns is considered from the perspective of a risk‐averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression relation can seem weak when described by usual statistical measures, but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability.

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