Predictor imperfection: international evidence

ABSTRACT

Pástor and Stambaugh (2009) demonstrate that the relationship between predictors and equity premium is imperfect in US market using a new model named predictive system. This article extends their study by providing international evidence of predictor imperfection using samples from G7 countries. Our results show that predictor imperfection is ubiquitous in all G7 countries and that investors’ prior beliefs about the relationship between predictors and equity premium play a significant role in predictor’s explanatory power.

KEYWORDS:

• Predictor imperfection
• international evidence
• prior belief
• equity premium

JEL CLASSIFICATION:

• G10
• G11
• C11

Acknowledgments

Yong Li gratefully acknowledges the financial support of the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China (No. 14XNI005). We are grateful to Xiaoneng Zhu for sharing the data.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

Wenbo Wu (corresponding author) gratefully acknowledges the financial support of the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China [No. 14XNI005].