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On the Predictability of Stock Returns: An Asset‐Allocation Perspective
Author(s) -
KANDEL SHMUEL,
STAMBAUGH ROBERT F.
Publication year - 1996
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1996.tb02689.x
Subject(s) - predictability , stock (firearms) , econometrics , economics , portfolio , asset allocation , bayesian probability , cash , actuarial science , financial economics , statistics , mathematics , finance , mechanical engineering , engineering
Sample evidence about the predictability of monthly stock returns is considered from the perspective of a risk‐averse Bayesian investor who must allocate funds between stocks and cash. The investor uses the sample evidence to update prior beliefs about the parameters in a regression of stock returns on a set of predictive variables. The regression relation can seem weak when described by usual statistical measures, but the current values of the predictive variables can exert a substantial influence on the investor's portfolio decision, even when the investor's prior beliefs are weighted against predictability.