Data Revisions and Out-of-Sample Stock Return Predictability

Economic Inquiry, Vol. 47, Issue 1, pp. 81-97, January 2009

17 Pages Posted: 26 Jan 2009

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Abstract

It has been found that the consumption-wealth ratio (cay) constructed from revised data is a strong predictor of stock market returns. This paper shows that its out-of-sample forecasting power becomes substantially weaker if cay is estimated using information available at the time of forecast. The difference, which mainly reflects periodic revisions in consumption and labor income data, is consistent with the conjecture that cay is a theoretically motivated variable. That is, revised data outperform real-time data because the former have smaller measurement errors. Nevertheless, practitioners should be cautious when they need to use real-time cay as a forecasting variable.

JEL Classification: G10, G14

Suggested Citation

Guo, Hui, Data Revisions and Out-of-Sample Stock Return Predictability. Economic Inquiry, Vol. 47, Issue 1, pp. 81-97, January 2009, Available at SSRN: https://ssrn.com/abstract=1331694 or http://dx.doi.org/10.1111/j.1465-7295.2008.00169.x

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

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