The scale of predictability

F. M. Bandi, B. Perron, A. Tamoni, C. Tebaldi

Research output: Contribution to journalArticlepeer-review

14 Scopus citations

Abstract

We introduce a new stylized fact: the hump-shaped behavior of slopesand coefficients of determination as a function of the aggregation horizon when running (forward/backward) predictive regressions of future excess market returns onto past economic uncertainty (as proxied by market variance, consumption variance, or economic policy uncertainty). To justify this finding formally, we propose a novel modeling framework in which predictability is specified as a property of components of both excess market returns and economic uncertainty. We dub this property scale-specific predictability. We show that classical predictive systems imply restricted forms of scale-specific predictability. We conclude that for certain predictors, like economic uncertainty, the restrictions imposed by classical predictive systems may be excessively strong.

Original languageEnglish (US)
Pages (from-to)120-140
Number of pages21
JournalJournal of Econometrics
Volume208
Issue number1
DOIs
StatePublished - Jan 2019
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Aggregation
  • Frequency
  • Predictability
  • Risk-return trade-off

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