Instability of Return Prediction Models

Paye, Bradley S.; Timmermann, Allan

doi:10.2139/ssrn.730844

Cited by 125 publications

(126 citation statements)

References 87 publications

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“…First, while this paper focuses exclusively on the stock markets, the issue of time‐varying return predictability has also been addressed in other asset markets (see, for example, Yilmaz, 2003; Cajueiro and Tabak, 2007). Second, researchers have recently begun to examine the structural stability of the parameters in traditional predictive regression models of aggregate stock returns (see, for example, Paye and Timmermann, 2006; Rapach and Wohar, 2006; Lettau and Nieuwerburgh, 2008; Hjalmarsson, 2009). Their evidence suggests that the predictive ability of financial variables varies markedly over time.…”

Section: Discussionmentioning

confidence: 99%

The Evolution of Stock Market Efficiency Over Time: A Survey of the Empirical Literature

Lim

Brooks²

2011

Journal of Economic Surveys

321

152

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This paper provides a systematic review of the weak-form market efficiency literature that examines return predictability from past price changes, with an exclusive focus on the stock markets. Our survey shows that the bulk of the empirical studies examine whether the stock market under study is or is not weak-form efficient in the absolute sense, assuming that the level of market efficiency remains unchanged throughout the estimation period. However, the possibility of time-varying weak-form market efficiency has received increasing attention in recent years. We categorize these emerging studies based on the research framework adopted, namely non-overlapping sub-period analysis, time-varying parameter model and rolling estimation window. An encouraging development is that the documented empirical evidence of evolving stock return predictability can be rationalized within the framework of the adaptive markets hypothesis.

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Section: Discussionmentioning

confidence: 99%

The Evolution of Stock Market Efficiency Over Time: A Survey of the Empirical Literature

Lim

Brooks²

2011

Journal of Economic Surveys

321

152

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“…Further, a number of recent studies point out the importance of time‐varying parameters on predictive regressions. See for example, Stock and Watson (1996), Pesaran and Timmerman (2002), Rapach and Wohar (2005), Paye and Timmerman (2005), and Goyal and Welch (2003).…”

mentioning

confidence: 99%

Can Managers Successfully Time the Maturity Structure of Their Debt Issues?

Butler¹,

Grullon²,

Weston³

2006

The Journal of Finance

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This paper provides a rational explanation for the apparent ability of managers to successfully time the maturity of their debt issues. We show that a structural break in excess bond returns during the early 1980s generates a spurious correlation between the fraction of long-term debt in total debt issues and future excess bond returns. Contrary to Baker, Taliaferro, and Wurgler (2006) , we show that the presence of structural breaks can lead to nonsense regressions, whether or not there is any small sample bias. Tests using firm-level data further confirm that managers are unable to time the debt market successfully. Copyright 2006 by The American Finance Association.

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“…Hence, the potential advantage of bagging lies in areas where small sample is common. Bagging will be particularly relevant and useful in practice when structural breaks are frequent so that simply using as many observations as possible is not a wise choice for out-of-sample prediction, as emphasized in Timmermann (2002b, 2004) and Paye and Timmermann (2003).…”

Section: Discussionmentioning

confidence: 99%