Structural Change and the Predictability of Stock Returns
نویسنده
چکیده
In this paper, we examine the structural stability of predictive regression models of quarterly real stock returns over the postwar era. We consider predictive regressions models of S&P 500 and CRSP equal-weighted real stock returns based on eight financial variables that display predictive ability in the extant literature. We test for structural stability using the popular Andrews (1993) SupF statistic and the Bai (1997) subsample procedure, as well as the recently developed methodology of Bai and Perron (1998, 2001, 2003). We find significant evidence of structural breaks in seven of eight predictive regression models of S&P 500 returns. There is less evidence of structural instability in predictive regression models of CRSP equalweighted returns, with three of eight models displaying significant evidence of a structural break. JEL classifications: C22, C52, C53, G12
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