Efficient Tests of Stock Return Predictability

Campbell, John Y.; Yogo, Motohiro

doi:10.2139/ssrn.343782

Cited by 274 publications

(538 citation statements)

References 43 publications

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“…With respect to possible size distortions of t ‐statistics due to near‐unit root properties of the regressor, Elliott and Stock (1994) derive an alternative asymptotic theory in which they explicitly model the regressor as having a local‐to‐unit root. A number of recent finance papers apply this theory to the question of stock return predictability (see, e.g., Torous, Valkanov, and Yan (2001), Jansson and Moreira (2003), Campbell and Yogo (2005), and Polk, Thompson, and Vuolteenaho (2003)). Under this alternative methodology, the researcher can construct Bonferroni‐based tests that are robust to the persistence problem by directly incorporating Dickey‐Fuller (1979) confidence intervals around the autoregressive parameter.…”

Section: Resultsmentioning

confidence: 99%

On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

Boudoukh¹,

Michaely²,

Richardson³

et al. 2007

The Journal of Finance

567

213

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We investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find statistically and economically significant predictability in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus issuances) yields are used instead of the dividend yield. Similarly, we find that payout (net payout) yields contains information about the cross section of expected stock returns exceeding that of dividend yields, and that the high minus low payout yield portfolio is a priced factor.WHILE THE IRRELEVANCE THEOREM of Miller and Modigliani (1961) implies that there is no reason to suspect that dividends play a role in determining equity price levels or equity returns, the theorem is silent on the usefulness of dividends in explaining these variables. It is then, perhaps, not surprising that there is a considerable literature exploiting the properties of dividends and dividend yields to better understand the fundamentals of asset pricing both in the time series and in the cross section. Motivation for the former comes from variations of the Gordon growth model in which dividend yields can be written as the return minus the dividend's growth rate (see, e.g., Fama and French (1988)), from consumption-based asset pricing models in which the firm's dividends covary with aggregate consumption (e.g., Lucas (1978) and Shiller (1981)), and so forth. Additional motivation comes from cross-sectional heterogeneity in tax, agency, and asymmetric information considerations (e

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Section: Resultsmentioning

confidence: 99%

On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

Boudoukh¹,

Michaely²,

Richardson³

et al. 2007

The Journal of Finance

567

213

View full text Add to dashboard Cite

show abstract

“…In equity markets, the evidence pertains to nominal interest rates. Fama and Schwert (1977) show that high nominal interest rates decrease future returns, a finding confirmed by Campbell and Yogo (2006). Using efficient tests of stock market predictability, they reject the null of no predictability for the nominal risk‐free rate at monthly and quarterly frequencies over the 1952 to 2002 period.…”

Section: Modelmentioning

confidence: 87%

“…Second, the model implies that price‐dividend ratios predict equity excess returns with a positive sign. The equity data, however, suggest either a negative sign, as in Lettau and Van Nieuwerburgh (2008), or no significant predictability at all, as in Campbell and Yogo (2006). Third, the model seems to overestimate the autocorrelation of real risk‐free rates.…”

Section: Simulationmentioning

confidence: 88%

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A Habit‐Based Explanation of the Exchange Rate Risk Premium

Verdelhan

2010

The Journal of Finance

413

228

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This paper presents a model that reproduces the uncovered interest rate parity puzzle. Investors have preferences with external habits. Countercyclical risk premia and procyclical real interest rates arise endogenously. During bad times at home, when domestic consumption is close to the habit level, the representative investor is very risk averse. When the domestic investor is more risk averse than her foreign counterpart, the exchange rate is closely tied to domestic consumption growth shocks. The domestic investor therefore expects a positive currency excess return. Because interest rates are low in bad times, expected currency excess returns increase with interest rate differentials. Copyright (c) 2009 the American Finance Association.

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“…Table 1 provides the autocorrelations and correlations of the three predicting variables. All three variables have high autocorrelations, which suggests that the predictive regression may be biased, as suggested by Campbell and Yogo (2006) and Torus, Valkanov and Yan (2004). So the predictability results should be interpreted with caution.…”

Section: Data and Empirical Strategymentioning

confidence: 99%

An Intertemporal Capital Asset Pricing Model with Owner-Occupied Housing

Chu

2010

Real Estate Economics

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This article studies portfolio choice and asset pricing in the presence of owner-occupied housing in a continuous time framework. The unique feature of the model is that housing is a consumption good as well as a risky asset. Under general conditions, that is, when the utility function is not Cobb-Douglas and the covariance matrix is not block-diagonal, the model shows that the market portfolio is not mean-variance efficient, and the traditional capital asset pricing model fails. Nonetheless, a conditional linear factor pricing model holds with housing return and market portfolio return as two risk factors. The model also predicts that the nondurable consumption-to-housing ratio ("ch") can forecast financial asset returns. The two factor pricing model conditioning on "ch" yields a good cross-sectional fit for Fama-French 25 portfolios. Copyright (c) 2010 American Real Estate and Urban Economics Association.

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Efficient Tests of Stock Return Predictability

Cited by 274 publications

References 43 publications

On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing

A Habit‐Based Explanation of the Exchange Rate Risk Premium

An Intertemporal Capital Asset Pricing Model with Owner-Occupied Housing

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