2012/10/01 by Abhay Abhyankar, Devraj Basu, Alexander Stremme
Economics, Econometrics and Finance · #Financial Markets and Investment Strategies #Credit Risk and Financial Regulations #Banking stability, regulation, efficiency
paper · doi:10.1017/s0022109012000415
Abstract In this paper we study the economic value and statistical significance of asset return predictability, based on a wide range of commonly used predictive variables. We assess the performance of dynamic, unconditionally efficient strategies, first studied by Hansen and Richard (1987) and Ferson and Siegel (2001), using a test that has both an intuitive economic interpretation and known statistical properties. We find that using the lagged term spread, credit spread, and inflation significantly improves the risk-return trade-off. Our strategies consistently outperform efficient buy-and-hold strategies, both in and out of sample, and they also incur lower transactions costs than traditional conditionally efficient strategies.