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.
|Pages (from-to)||973 - 1001|
|Number of pages||28|
|Journal||Journal of Financial and Quantitative Analysis|
|Publication status||Published - 4 Oct 2012|
- empirical study
- asset return predictability
- efficient strategies