We introduce a new stylized fact: the hump-shaped behavior of slopes and coeffcients of determination as a function of the aggregation horizon when running (forward/backward) predictive regressions of future excess market returns onto past economic uncertainty (as proxied by market variance, consumption variance, or economic policy uncertainty). To justify this finding formally, we propose a novel modeling framework in which predictability is specified as a property of low-frequency components of both excess market returns and economic uncertainty. We dub this property scale-specific predictability. We show that classical predictive systems imply restricted forms of scale-specific predictability. We conclude that for certain predictors, like economic uncertainty, the restrictions imposed by classical predictive systems may be excessively strong.

The scale of predictability

Tamoni, Andrea
Methodology
;
Tebaldi, Claudio
Methodology
2019

Abstract

We introduce a new stylized fact: the hump-shaped behavior of slopes and coeffcients of determination as a function of the aggregation horizon when running (forward/backward) predictive regressions of future excess market returns onto past economic uncertainty (as proxied by market variance, consumption variance, or economic policy uncertainty). To justify this finding formally, we propose a novel modeling framework in which predictability is specified as a property of low-frequency components of both excess market returns and economic uncertainty. We dub this property scale-specific predictability. We show that classical predictive systems imply restricted forms of scale-specific predictability. We conclude that for certain predictors, like economic uncertainty, the restrictions imposed by classical predictive systems may be excessively strong.
2019
2018
Bandi, Federico M.; Perron, Benoit; Tamoni, Andrea; Tebaldi, Claudio
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11565/4002074
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