What Drives Market Return Predictability?

Market return predictability may be driven by time varying discount rates or changing beliefs of cash flow. We use analyst earnings forecast to separate cash flow and discount rate components of returns and distinguish the source of return predictability by a set of predictive variables commonly used in the literature. The overall evidence is consistent with the idea that the predictive variables capture time varying discount rates. Some variables also predict cash flow component of returns, implying that these predictive variables may capture investors' biases in projecting aggregate future cash flows.

[1]  K. Wei,et al.  Limits-to-arbitrage, investment frictions, and the asset growth anomaly , 2011 .

[2]  John H. Cochrane,et al.  Presidential Address: Discount Rates , 2011 .

[3]  Long Chen,et al.  An Alternative Three-Factor Model , 2011 .

[4]  Federico Nardari,et al.  Time-varying short-horizon predictability ☆ , 2011 .

[5]  A. Purnanandam,et al.  Is Default Risk Negatively Related to Stock Returns , 2010 .

[6]  Zhi Da,et al.  Cashflow risk, systematic earnings revisions, and the cross-section of stock returns , 2009 .

[7]  R. Priestley,et al.  Time-Varying Risk Premiums and the Output Gap , 2009 .

[8]  Guofu Zhou,et al.  Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy , 2009 .

[9]  D. Hirshleifer,et al.  Accruals, cash flows, and aggregate stock returns , 2009 .

[10]  Bruce D. Phelps.  A Comprehensive Look at the Empirical Performance of Equity Premium Prediction , 2009 .

[11]  S. B. Thompson,et al.  Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average? , 2008 .

[12]  Long Chen.  On the Reversal of Return and Dividend Growth Predictability: A Tale of Two Periods , 2008 .

[13]  X. Gabaix.  Variable Rare Disasters: A Tractable Theory of Ten Puzzles in Macro-finance , 2008 .

[14]  Ahmed Sule,et al.  On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing , 2007 .

[15]  Michael J. Cooper,et al.  Asset Growth and the Cross-Section of Stock Returns , 2007 .

[16]  R. Barro.  Rare Disasters and Asset Markets in the Twentieth Century , 2006 .

[17]  Ľuboš Pástor,et al.  Estimating the Intertemporal Risk-Return Tradeoff Using the Implied Cost of Capital , 2006 .

[18]  M. Lettau,et al.  Reconciling the Return Predictability Evidence , 2005 .

[19]  Christopher Polk,et al.  The Value Spread , 2003 .

[20]  J. Lewellen,et al.  Predicting Returns with Financial Ratios , 2002 .

[21]  Sergei Sarkissian,et al.  Spurious Regressions in Financial Economics? , 2002 .

[22]  Doron Avramov,et al.  Stock Return Predictability and Model Uncertainty , 2001 .

[23]  Sheridan Titman,et al.  Capital Investments and Stock Returns , 2001, Journal of Financial and Quantitative Analysis.

[24]  Andrew Ang,et al.  Stock Return Predictability: Is it There? , 2001 .

[25]  Pietro Veronesi,et al.  Labor Income and Predictable Stock Returns , 2001 .

[26]  Ravi Bansal,et al.  Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles , 2000 .

[27]  Charles M. C. Lee,et al.  Toward an Implied Cost of Capital , 2000 .

[28]  M. Cremers.  Stock Return Predictability: A Bayesian Model Selection Perspective , 2000 .

[29]  Jeffrey Wurgler,et al.  The Equity Share in New Issues and Aggregate Stock Returns , 1999 .

[30]  Sydney C. Ludvigson,et al.  Consumption, Aggregate Wealth and Expected Stock Returns , 1999 .

[31]  R. Stambaugh,et al.  Predictive Regressions , 1999 .

[32]  Stephen M. Horan.  Book-to-Market Ratios as Predictors of Market Returns , 1999 .

[33]  P. Bossaerts,et al.  Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn? , 1999 .

[34]  Josef Lakonishok,et al.  Good News for Value Stocks: Further Evidence on Market Efficiency , 1997 .

[35]  S. Kothari,et al.  Book-to-Market, Dividend Yield, and Expected Market Returns: A Time-Series Analysis , 1997 .

[36]  J. Campbell,et al.  By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior , 1995, Journal of Political Economy.

[37]  R. Stambaugh,et al.  On the Predictability of Stock Returns: An Asset-Allocation Perspective , 1995 .

[38]  Allan Timmermann,et al.  How Learning in Financial Markets Generates Excess Volatility and Predictability in Stock Prices , 1993 .

[39]  C. Nelson,et al.  Predictable Stock Returns: The Role of Small Sample Bias , 1993 .

[40]  Narasimhan Jegadeesh,et al.  Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K. , 1991 .

[41]  R. Hodrick.  Dividend Yields and Expected Stock Returns: Alternative Procedures for Interference and Measurement , 1991 .

[42]  John Y. Campbell,et al.  What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns , 1991 .

[43]  J. Cochrane.  Production‐Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations , 1991 .

[44]  E. Fama,et al.  BUSINESS CONDITIONS AND EXPECTED RETURNS ON STOCKS AND BONDS , 1989 .

[45]  E. Fama,et al.  Dividend yields and expected stock returns , 1988 .

[46]  E. Fama,et al.  Permanent and Temporary Components of Stock Prices , 1988, Journal of Political Economy.

[47]  R. Shiller,et al.  Stock Prices, Earnings and Expected Dividends , 1988 .

[48]  K. French,et al.  Expected stock returns and volatility , 1987 .

[49]  R. Shiller,et al.  The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors , 1986 .

[50]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .

[51]  R. Mehra,et al.  THE EQUITY PREMIUM A Puzzle , 1985 .

[52]  R. C. Merton,et al.  On Estimating the Expected Return on the Market: An Exploratory Investigation , 1980 .

[53]  R. Ball.  Anomalies in relationships between securities' yields and yield-surrogates , 1978 .

[54]  C. Granger,et al.  Spurious regressions in econometrics , 1974 .

[55]  R. C. Merton,et al.  AN INTERTEMPORAL CAPITAL ASSET PRICING MODEL , 1973 .

[56]  E. Fama,et al.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[57]  P. Seiler,et al.  Speculative dynamics , 2010 .

[58]  R. Thaler,et al.  Chapter 18 A survey of behavioral finance , 2003 .

[59]  R. Thaler,et al.  The Equity Premium Puzzle , 2001 .

[60]  James N. Myers,et al.  What is the Intrinsic Value of the Dow , 1997 .

[61]  J. Stein,et al.  A Unified Theory of Underreaction, Momentum Trading and Overreaction in Asset Markets , 1997 .

[62]  M. Coe,et al.  Rewriting history , 1993, Nature.

[63]  Motohiro Yogo,et al.  The Rodney L. White Center for Financial Research Does Firm Value Move Too Much to Be Justified by Subsequent Changes in Cash Flow? , 2022 .