Home About Latest Browse RSS Advanced Search

Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
The Decline in Asset Return Predictability and Macroeconomic Volatility
Alex Hsu
Francisco J. Palomino
Charles Qian
Abstract

We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more persistent and less volatile shocks explain the lower predictability.


Download Full text
Cite this item
Alex Hsu & Francisco J. Palomino & Charles Qian, The Decline in Asset Return Predictability and Macroeconomic Volatility, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-050, May 2017.
More from this series
JEL Classification:
Subject headings:
Keywords: Asset return predictability ; Great Moderation ; Monetary policy ; Time-varying macroeconomic volatility
DOI: 10.17016/FEDS.2017.050
For corrections, contact Ryan Wolfslayer ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal