Break Risk. (14th August 2020)

• Record Type: Journal Article
• Authors: Smith, Simon C; Timmermann, Allan
• Editors: Van Nieuwerburgh, Stijn
• Is Part Of: Review of financial studies. Volume 34:Number 4(2021)
• Page Start: 2045
• Page End: 2100
• Publication Date: 2020-08-14
• Subjects: G10 -- C11 -- C15; Finance -- United States -- Periodicals; Finance -- Periodicals; 332
• DOI: 10.1093/rfs/hhaa084
• Languages: English
• ISSNs: 0893-9454

Abstract

Abstract: We develop a new approach to modeling and predicting stock returns in the presence of breaks that simultaneously affect a large cross-section of stocks. Exploiting information in the cross-section enables us to detect breaks in return prediction models with little delay and to generate out-of-sample return forecasts that are significantly more accurate than those from existing approaches. To identify the economic sources of breaks, we explore the asset pricing restrictions implied by a present value model which links breaks in return predictability to breaks in the cash flow growth and discount rate processes.