We use a general equilibrium model as a laboratory for generating predictable excess returns and for assessing the properties of the estimated consumption/portfolio rules, under both the empirical and the true dynamics of excess returns. The advantage of this approach, relative to the existing...

A number of recent studies have measured the quantitative effect of excess return predictability on the optimal consumption and portfolio choices of a rational investor, and they have used the utility costs of ignoring predictability as a natural measure of economic significance. We use a...