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The horizon effect of stock return predictability and model uncertainty on portfolio choice: UK evidence

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  • Guangjie Li

Abstract

We study how stock return's predictability and model uncertainty affect a rational buy-and-hold investor's decision to allocate her wealth for different lengths of investment horizons in the UK market. We consider the Financial Times Stock Exchange (FTSE) All-Share Index as the risky asset, and the UK Treasury bill as the risk free asset in forming the investor's portfolio. We identify the most powerful predictors of the stock return by accounting for model uncertainty. We find that though stock return predictability is weak, it can still affect the investor's optimal portfolio decision over different investment horizons.

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  • Guangjie Li, 2011. "The horizon effect of stock return predictability and model uncertainty on portfolio choice: UK evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 21(11), pages 771-787.
    • Handle: RePEc:taf:apfiec:v:21:y:2011:i:11:p:771-787
    DOI: 10.1080/09603107.2010.537630
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    References listed on IDEAS

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    1. Brennan, Michael J & Xia, Yihong, 2001. "Assessing Asset Pricing Anomalies," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 905-942.
    2. Michael J. BRENNAN & Yihong XIA, 1999. "Assessing Asset Pricing Anomalies," FAME Research Paper Series rp10, International Center for Financial Asset Management and Engineering.
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    Cited by:

    1. Wade D. Pfau, 2012. "Long-term investors and valuation-based asset allocation," Applied Financial Economics, Taylor & Francis Journals, vol. 22(16), pages 1343-1353, August.

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