Predictive Systems: Living with Imperfect Predictors
We develop a framework for estimating expected returns-a "predictive system"-that allows predictors to be imperfectly correlated with the conditional expected return. When predictors are imperfect, the estimated expected return depends on past returns in a manner that hinges on the correlation between unexpected returns and innovations in expected returns. We find empirically that prior beliefs about this correlation, which is most likely negative, substantially affect estimates of expected returns as well as various inferences about predictability, including assessments of a predictor's usefulness. Compared to standard predictive regressions, predictive systems deliver different expected returns with higher estimated precision. Copyright (c) 2009 the American Finance Association.
Year of publication: |
2009
|
---|---|
Authors: | PÁSTOR, LUBOS ; STAMBAUGH, ROBERT F. |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 64.2009, 4, p. 1583-1628
|
Publisher: |
American Finance Association - AFA |
Saved in:
freely available
Saved in favorites
Similar items by person
-
Costs of Equity Capital and Model Mispricing
Pástor, Lubos, (1999)
-
ARTICLES - Costs of Equity Capital and Model Mispricing
Pástor, Lubos, (1999)
-
ARTICLES - The Equity Premium and Structural Breaks
Pástor, Lubos, (2001)
- More ...