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http://hdl.handle.net/10419/24637
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| Title: | | Why Are Asset Returns Predictable?  |
| Authors: | | Lüders, Erik |
| Issue Date: | | 2002 |
| Series/Report no.: | | ZEW Discussion Papers 02-48 |
| Abstract: | | Starting from an information process governed by a geometric Brownian motion we show that asset returns are predictable if the elasticity of the pricing kernel is not constant. Declining [Increasing] elasticity of the pricing kernel leads to mean reversion and negatively autocorrelated asset returns [mean aversion and positively autocorrelated asset returns]. Under nonconstant elasticity of the pricing kernel financial ratios as the price-earnings ratio have predictive power for future asset returns. In addition, it is shown that asset prices will be governed by a time-homogeneous stochastic differential equation only under the constant elasticity pricing kernel. Hence, usually asset price processes do not satisfy the assumptions needed for empirical estimation. |
| Subjects: | | Pricing kernel Diffusion processes Stationarity Predictability of asset returns Autocorrelation |
| JEL: | | G12 |
| Document Type: | | Working Paper |
| Appears in Collections: | | Publikationen von Forscherinnen und Forschern des ZEW ZEW Discussion Papers
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| dp0248.pdf | | 433.62 kB | Adobe PDF |
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