Can Output Explain the Predictability and Volatility of Stock Returns?

CEPR Discussion Paper No. 1995

Posted: 28 Dec 1998

See all articles by Juan Ignacio Peña

Juan Ignacio Peña

Charles III University of Madrid - Department of Business Administration

Fernando Restoy

Banco de España

Rosa Rodríguez

Universidad Europea de Madrid - Departamento de Matematica

Date Written: October 1998

Abstract

In this paper we have studied the ability of relatively standard equilibrium asset pricing models to explain two important empirical regularities of asset returns extensively documented in the literature: i) returns can be predicted by a set of macro variables; and ii) returns are very volatile. Those empirical regularities are relevant because they have often been used to reject market efficiency. In the analysis we have made use of the approximation technology in the solution of intertemporal asset pricing models recently developed by Campbell (1993) in the form suggested by Restoy and Weil (1997). We have obtained evidence from eight OECD economies using both quarterly and annual observations. Equilibrium models seem generally to find fewer difficulties in explaining the volatility of returns than their predictability for general output processes. In the case of the United States, for annual frequencies the observed predictability and volatility of asset returns are broadly compatible with the predictions of equilibrium models for a reasonable specification of preferences.

JEL Classification: G12, G14

Suggested Citation

Peña, Juan Ignacio and Restoy, Fernando and Rodríguez López, Rosa, Can Output Explain the Predictability and Volatility of Stock Returns? (October 1998). CEPR Discussion Paper No. 1995, Available at SSRN: https://ssrn.com/abstract=141553

Juan Ignacio Peña (Contact Author)

Charles III University of Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Fernando Restoy

Banco de España ( email )

Madrid 28014
Spain
(34 91) 338 5119 (Phone)
(34 91) 338 5678 (Fax)

Rosa Rodríguez López

Universidad Europea de Madrid - Departamento de Matematica ( email )

Edificio C. Villaviciosa de Odon
Madrid, 28670
Spain
(+34)- 91-6647800 (Phone)

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