What Is the Maximum Predictability Permitted by Asset Pricing Models?

• Main Author: Huang, Dashan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2013
• Subjects: Return predictability; predictive regression; stochastic discount factor; Business Administration, Management, and Operations
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/3776; https://ink.library.smu.edu.sg/context/lkcsb_research/article/4775/viewcontent/S2C1_Huang.pdf
• Institution: Singapore Management University

This paper investigates whether return predictability can be explained by existing asset pricing models. Using different assumptions, I develop two theoretical upper bounds on the R-square of the regression of stock returns on predictive variables. Empirically, I find that the predictive R-square is...