PÁSTOR, LUBOS; STAMBAUGH, ROBERT F. - In: Journal of Finance 64 (2009) 4, pp. 1583-1628
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...