The poor predictive performance of asset pricing models

Research output: Contribution to journalArticle

28 Scopus citations

Abstract

This paper examines time-series forecast errors of expected returns from conditional and unconditional asset pricing models for portfolio and individual firm equity returns. A new result that increases predictive precision concerning model specification and forecasting is introduced. Conditional versions of the models generally produce higher mean squared errors than unconditional versions for step ahead prediction. This holds for individual firm data when the instruments are firm specific. Mean square forecast error decompositions indicate that the asset pricing models produce relatively unbiased predictions, but the variance is severe enough to ruin the step ahead predictive ability beyond that of a constant benchmark.

Original languageEnglish (US)
Pages (from-to)355-380
Number of pages26
JournalJournal of Financial and Quantitative Analysis
Volume43
Issue number2
DOIs
StatePublished - Jun 2008

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'The poor predictive performance of asset pricing models'. Together they form a unique fingerprint.

  • Cite this