What Predicts Stock Returns? – The Role of Expected versus Unexpected Predictors
Stock returns could be predictable due to time-varying expected returns. In this paper, we model the conditional expected return as an unobservable state variable affected directly by the expected components of predictors. This ap- proach separates the different role played by expected versus unexpected pre- dictors, while avoiding both the error-in-variables problem due to imperfect predictors and bias due to persistent predictors in a typical predictive regres- sion. In addition, the feature of negative correlation between an innovation in the expected return and the unexpected stock return is build into the model from imposing the return identity. At the same time, the unexpected components in predictors are allowed to co-move with the unexpected cash flow component of the stock return. This flexible correlation structure improves the eciency in estimating the conditional expected returns. More importantly, we are able to study the role of predictors in forming the expected return as well as predicting the cash flow component of returns.
Cash Flow Expected Return Kalman Filter MCMC Repurchasing Yield
Nina Baranchuk Yexiao Xu
School of Management The University of Texas at Dallas School Of Management,The University of Texas at Dallas,PO Box 688,Richardson,Texas 75080,USA
国际会议
大连
英文
1-41
2008-07-02（万方平台首次上网日期，不代表论文的发表时间）