Why Are Asset Returns Predictable?

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ZEW Discussion Papers ; No. 02-48

Classification and Topics

• Classification: Wirtschaft ; Asset Pricing; Trading Volume; Bond Interest Rates
• Subject: Pricing kernel ; Diffusion processes ; Stationarity ; Predictability of asset returns ; Autocorrelation ; Kapitalertrag ; Börsenkurs ; Prognoseverfahren ; Wertpapieranalyse ; Kapitalmarkttheorie ; Risikoaversion ; Stochastischer Prozeß ; Autokorrelation ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Lüders, Erik
• Event: Veröffentlichung
• (who): Zentrum für Europäische Wirtschaftsforschung (ZEW)
• (where): Mannheim
• (when): 2002

Further information

• Handle: http://hdl.handle.net/10419/24637
• Last update: 10.03.2025, 11:43 AM CET