Stock Return Predictability and Asset Pricing Models

Abstract
This article develops an asset allocation framework that incorporates prior beliefs about the extent of stock return predictability explained by asset pricing models. We find that when prior beliefs allow even minor deviations from pricing model implications, the resulting asset allocations depart considerably from and substantially outperform allocations dictated by either the underlying models or the sample evidence on return predictability. Under a wide range of beliefs about model pricing abilities, asset allocations based on conditional models outperform their unconditional counterparts that exclude return predictability.
Volume
17
Page
699-738
Number
3
Year
2004
Categories
CAPM/Asset Pricing
Publications
Review of Financial Studies
Authors
Avramov, Doron