Three essays on economics of predictability of stock returns

Abstract

In the first essay of this dissertation I analyze predictability of returns generated by the long-run risks model of Bansal and Yaron (2004). I uncover some counterfactual features of the predictability and connect them with the specific features of the long- run risks processes. In the second essay, I analyze the effect of the aggregation on the predictability in the long-run risks model. I found that the aggregation implies that a part of expected dividend growth is observable and points at the nature of the additional to the dividend-price ratio variables which might help to predict returns. In the third essay, I use expected returns and expected dividend growth processes implied by the long-run risks and other models to analyze the out-of-sample performance of the predictive regression and some of its alternatives. My analysis suggests that the poor out-of-sample performance is due to the finite sample noise and a large unpredictable component in returns.