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RFS Advance Access originally published online on October 15, 2003
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Rev Fin 2004; 17:699-738
The Review of Financial Studies Vol. 17, No. 3 © 2004 The Society for Financial Studies; all rights reserved.

Stock Return Predictability and Asset Pricing Models

Doron Avramov
University of Maryland

Address correspondence to Doron Avramov, Finance Department, University of Maryland, Van Munching Hall, College Park, MD 20742, or e-mail: davramov{at}rhsmith.umd.edu.

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.


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