Predictive Systems: Living with Imperfect Predictors / Lubos Pastor, Robert F. Stambaugh.

Format:

Book

Author/Creator:

Pastor, Lubos.

Contributor:

National Bureau of Economic Research.

Stambaugh, Robert F.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13804.

NBER working paper series no. w13804

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Predictive Systems

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2008.

Summary:

We develop a framework for estimating expected returns--a <i>predictive system</i>--that allows predictors to be imperfectly correlated with the conditional expected return. When predictors are imperfect, the estimated expected return depends on past returns in a manner that hinges on the correlation between unexpected returns and innovations in expected returns. We find empirically that prior beliefs about this correlation, which is most likely negative, substantially affect estimates of expected returns as well as various inferences about predictability, including assessments of a predictor's usefulness. Compared to standard predictive regressions, predictive systems deliver different and more precise estimates of expected returns.

Notes:

Print version record

February 2008.