Predicting stock returns

Doron Avramov*, Tarun Chordia

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

70 Scopus citations

Abstract

This paper studies whether incorporating business cycle predictors benefits a real time optimizing investor who must allocate funds across 3,123 NYSE-AMEX stocks and cash. Realized returns are positive when adjusted by the Fama-French and momentum factors as well as by the size, book-to-market, and past return characteristics. The investor optimally holds small-cap, growth, and momentum stocks and loads less (more) heavily on momentum (small-cap) stocks during recessions. Returns on individual stocks are predictable out-of-sample due to alpha variation, whereas the equity premium predictability, the major focus of previous work, is questionable.

Original languageAmerican English
Pages (from-to)387-415
Number of pages29
JournalJournal of Financial Economics
Volume82
Issue number2
DOIs
StatePublished - Nov 2006
Externally publishedYes

Keywords

  • Business cycle
  • Equity characteristics
  • Estimation risk
  • Predictability
  • Risk factors

Fingerprint

Dive into the research topics of 'Predicting stock returns'. Together they form a unique fingerprint.

Cite this