Predicting short-to-medium horizon returns

Abstract

This chapter lays out what we know about stock return predictability on the short-to-medium horizon. It recognizes that most of the fluctuations in the stock market are unpredictable, but characterizes those that are. Another important lesson of this chapter is that stock markets are very volatile in the short run but appears to be less so in the long run. Paradoxically, this implies that it looks as if we can say a little more about the future movements in the stock market when dealing with the longer run (several years). From today until tomorrow, or next week, we can say very little. The chapter illustrates how stock returns are somewhat predictable by indicators such as the yield spread and the dividend yield.