The efficient market hypothesis describes an efficient market as one in which investors cannot consistently predict stock returns because prices instantly reflect all the information flowing into the market. However, return predictability has been documented in many markets. This study tests the...

Modern investors face a high-dimensional prediction problem: thousands of observable variables are potentially relevant for forecasting. We reassess the conventional wisdom on market efficiency in light of this fact. In our model economy, which resembles a typical machine learning setting, N...

This paper reconsiders the effect of investor sentiment on stock prices. Using survey-based sentiment indicators from Germany and the US we confirm previous findings of predictability at intermediate time horizons. The main contribution of our paper is that we also analyze the immediate price...

This article documents how the changing composition of U.S. publicly traded firms has prompted a decline in the long-run mean of the aggregate dividend-price ratio, most notably since the 1970s. Adjusting the dividend-price ratio for such changes resolves several issues with respect to the...

We perform a large-scale empirical analysis of pairs trading, a popular relative-value arbitrage approach. We start with a cross-country study of 34 international stock markets and uncover that abnormal returns are a persistent phenomenon. We then construct a comprehensive U.S. data set to...

This study measures the degree of short-horizon return predictability of 50 international equity markets and examines how its variation is related to the indicators of equity market development. Two multiple-horizon variance ratio tests are employed to measure the degree of return...

This paper proposes a new approach for incorporating theoretical constraints on return forecasting models such as non-negativity of the conditional equity premium and sign restrictions on the coefficients linking state variables to the equity premium. Our approach makes use of Bayesian methods...

The dynamic dependencies in financial market volatility are generally well described by a long-memory fractionally integrated process. At the same time, the volatility risk premium, defined as the difference between the ex-post realized volatility and the market’s ex-ante expectation thereof,...

This paper shows that oil price changes, measured as short-term futures returns, are a strong predictor of excess stock returns at short horizons. Ours is a leading variable for the business cycle and exhibits low persistence which avoids the ctitious long-horizon predictability associated to...