Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7360629 | Journal of Empirical Finance | 2018 | 39 Pages |
Abstract
I analyse the relationship between two stylized empirical facts for stock returns: Unconditional long-term mean reversion and predictability by variables such as the dividend-price ratio or the short-term interest rate. In particular, I show that if one imposes that returns satisfy long-term mean reversion, this implies an upper bound on the predictive regression R-square. If a predictive regression is intended as a motivational building block for theoretical modelling, and the R-square bound is violated, one should recognize that the implied returns process violate long-term mean reversion. Empirical results show that the proposed bound is binding for several leading predictors.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Erik Hjalmarsson,