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RFS Advance Access originally published online on October 25, 2006
Review of Financial Studies 2008 21(4):1577-1605; doi:10.1093/rfs/hhl042
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© The Author 2006. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

The Myth of Long-Horizon Predictability

Jacob Boudoukh
Arison School of Business, IDC, Israel and NBER

Matthew Richardson
Stern School of Business, New York University and NBER

Robert F. Whitelaw
Stern School of Business, New York University and NBER

Address correspondence to Jacob Boudoukh, The Caesarea Center, IDC, 3 Kanfei Nesharim, Herzlia 46150, Israel, phone: 972-9-9527601, or e-mail: jboudouk{at}idc.ac.il.

JEL: G12, G14, C12


  Abstract

The prevailing view in finance is that the evidence for long-horizon stock return predictability is significantly stronger than that for short horizons. We show that for persistent regressors, a characteristic of most of the predictive variables used in the literature, the estimators are almost perfectly correlated across horizons under the null hypothesis of no predictability. For the persistence levels of dividend yields, the analytical correlation is 99% between the 1- and 2-year horizon estimators and 94% between the 1- and 5-year horizons. Common sampling error across equations leads to ordinary least squares coefficient estimates and R2s that are roughly proportional to the horizon under the null hypothesis. This is the precise pattern found in the data. We perform joint tests across horizons for a variety of explanatory variables and provide an alternative view of the existing evidence.

We would like to thank an anonymous referee, Matthew Spiegel, Jeff Wurgler, the paper's discussants John Cochrane, Motohiro Yogo and Shmuel Kandel, and seminar participants at Yale University, New York University, University of Maryland, Stanford University, U.C. Berkeley, the 5-Star Conference at the Salomon Center, the NBER Asset Pricing Program, and the Finance and Accounting Conference at Tel Aviv University for helpful comments.


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