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Should stock returns predictability be ‘hooked on’ long‐horizon regressions?

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  • Theologos Dergiades
  • Panos K. Pouliasis

Abstract

This paper re‐examines stock returns predictability over the business cycle using price‐dividend and price‐earnings valuation ratios as predictors. Unlike prior studies that habitually implement long‐horizon/predictive regressions, we conduct a testing framework in the frequency domain. Predictive regressions support no predictability; in contrast, our results in the frequency domain verify significant predictability at medium and long horizons. To robustify predictability patterns, the analysis is executed repetitively for fixed‐length rolling samples of various sizes. Overall, the stock returns are predictable for wavelengths higher than 5 years. This finding is robust and independent of time, window size and predictor.

Suggested Citation

  • Theologos Dergiades & Panos K. Pouliasis, 2023. "Should stock returns predictability be ‘hooked on’ long‐horizon regressions?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 718-732, January.
    • Handle: RePEc:wly:ijfiec:v:28:y:2023:i:1:p:718-732
    DOI: 10.1002/ijfe.2446
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    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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