Jialin Yu

Simple Forecasts and Paradigm Shifts

Coauthor(s): Harrison Hong, Jeremy Stein.

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Abstract:
We study the asset pricing implications of learning in an environment in which the true model of the world is a multivariate one, but agents update only over the class of simple univariate models. Thus, if a particular simple model does a poor job of forecasting over a period of time, it is discarded in favor of an alternative simple model. The theory yields a number of distinctive predictions for stock returns, generating forecastable variation in the magnitude of the value-glamour return differential, in volatility, and in the skewness of returns. We validate several of these predictions empirically.

Source: Journal of Finance
Exact Citation:
Hong, Harrison, Jeremy Stein, and Jialin Yu. "Simple Forecasts and Paradigm Shifts." Journal of Finance 62 (2007): 1207-42.
Volume: 62
Pages: 1207-42
Date: 2007