TY  - BOOK
AU  - Lettau,Martin
AU  - Van Nieuwerburgh,Stijn
ED  - National Bureau of Economic Research.
TI  - Reconciling the Return Predictability Evidence
T2  - NBER working paper series
PY  - 2006///
CY  - Cambridge, Mass.
PB  - National Bureau of Economic Research
N1  - March 2006; Hardcopy version available to institutional subscribers
N2  - Evidence of stock return predictability by financial ratios is still controversial, as documented by inconsistent results for in-sample and out-of-sample regressions and by substantial parameter instability. This paper shows that these seemingly incompatible results can be reconciled if the assumption of a fixed steady-state mean of the economy is relaxed. We find strong empirical evidence in support of shifts in the steady-state and propose simple methods to adjust financial ratios for such shifts. The forecasting relationship of adjusted price ratios and future returns is statistically significant and stable over time. We also show that shifts in the steady-state are responsible for the parameter instability and poor out-of-sample performance of unadjusted price ratios that are found in the data. Our conclusions hold for a variety of financial ratios and are robust to changes in the econometric technique used to estimate shifts in the steady-state
UR  - https://www.nber.org/papers/w12109
UR  - http://dx.doi.org/10.3386/w12109
ER  -