Date of this Version
Journal of Financial Economics
When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's finite-sample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under specifications that differ with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is specified as fixed or stochastic. The posteriors differ across such specifications, and asset allocations in the presence of estimation risk exhibit sensitivity to those differences.
© 1999. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.
Stambaugh, R. F. (1999). Predictive Regressions. Journal of Financial Economics, 54 (3), 375-421. http://dx.doi.org/10.1016/S0304-405X(99)00041-0
Date Posted: 27 November 2017
This document has been peer reviewed.