We present new evidence on the predictability of aggregate market returns by developing two new prediction models, one risk-based, and the other purely statistical. The pricing kernel model expresses the expected return as the covariance of the market return with a pricing kernel that is a...

Over the last two decades, alternative expected return proxies have been proposed with substantially lower variation than realized returns. This helped to reduce parameter uncertainty and to identify many seemingly robust relations between expected returns and variables of interest, which would...