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Time-varying short-horizon predictability

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  • Henkel, Sam James
  • Martin, J. Spencer
  • Nardari, Federico

Abstract

In the G7 countries, the short-horizon performance of aggregate return predictors such as the dividend yield and the short rate appears non-existent during business cycle expansions but sizable during contractions. This phenomenon appears related to countercyclical risk premiums as well as the time-variation in the dynamics of predictors. Our empirical model outperforms the historical average out-of-sample in the US, but the results throughout the G7 are mixed.

Suggested Citation

  • Henkel, Sam James & Martin, J. Spencer & Nardari, Federico, 2011. "Time-varying short-horizon predictability," Journal of Financial Economics, Elsevier, vol. 99(3), pages 560-580, March.
    • Handle: RePEc:eee:jfinec:v:99:y:2011:i:3:p:560-580
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