Abstract: We present new evidence on the predictability of aggregate market returns by developing two new prediction models, one risk-based, and the other purely statistical. The pricing kernel model expresses the expected return as the covariance of the market return with a pricing kernel that is a linear function of portfolio returns. The discount rate model predicts the expected return directly as a function of weighted past portfolio returns. These models provide independent evidence of predictability, with R2 of 1619% for 1-year returns. We show that innovations in the pricing kernel are associated with the cash ﬂow component of the market return.
Michael Brennan is the former Irwin and Goldyne Hearsh Professor of Banking and Finance at the University of California, Los Angeles, and Professor of Finance at the London Business School. He is currently Emeritus Professor at UCLA and Distinguished Visiting Professor at the University of Manchester. He was educated at Oxford, Pittsburgh and MIT. Dr. Brennan’s research interests include asset pricing, corporate finance and market microstructure. A former President of the American Finance Association, the Society for Financial Studies, and the Western Finance Association, Dr. Brennan has also served as Editor of the Journal of Finance and was the Founding Editor of the Review of Financial Studies. He has also served as a director of the National Bureau of Economic Research. He has received honorary degrees from B.I. (Oslo), Notre Dame University, University of Lancaster, London University, University of St Gallen, University of Stockholm, and the University of Zurich, and was named Financial Engineer of the Year in 2017.
Prof. Michael Brennan,
University of California at Los Angeles (UCLA) and University of Manchester
Time and Place: May 23, 2019, 16:15,
University of Piraeus, 80 Karaoli & Dimitriou Str., Piraeus,
More Upcoming Seminars in 2019:
May 30, 2019: Matti Suominen, Aalto University
June 6, 2019: Nicholas Economides, NYU Stern
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