tay's as good as cay

Reply

Martin Lettau, Sydney Ludvigson

    Research output: Contribution to journalArticle

    Abstract

    In a recent comment on our published work [Lettau, M., Ludvigson, S., 2001. Consumption, aggregate wealth, and expected stock returns. Journal of Finance 56, 815-850], Michael Brennan and Yihong Xia [2005. tay's as good as cay. Finance Research Letters 2, 1-14] advance the following argument: A "mechanistic" variable tay, where t is a linear time trend, forecasts stock returns. Since "t has no foresight," the argument goes, the predictive power of this variable must be attributable to what they call "look-ahead bias." The authors assert that cay is subject to the same look-ahead bias (generated because we use the full sample to estimate the cointegrating parameters in cay), implying that its forecasting power must be spurious. In this response, we explain why this critique is misplaced.

    Original languageEnglish (US)
    Pages (from-to)15-22
    Number of pages8
    JournalFinance Research Letters
    Volume2
    Issue number1
    DOIs
    StatePublished - Mar 2005

    Fingerprint

    Finance
    Stock returns
    Aggregate consumption
    Predictive power
    Time trends
    Wealth
    Foresight

    Keywords

    • cay
    • Forecasting power

    ASJC Scopus subject areas

    • Finance

    Cite this

    tay's as good as cay : Reply. / Lettau, Martin; Ludvigson, Sydney.

    In: Finance Research Letters, Vol. 2, No. 1, 03.2005, p. 15-22.

    Research output: Contribution to journalArticle

    Lettau, M & Ludvigson, S 2005, 'tay's as good as cay: Reply', Finance Research Letters, vol. 2, no. 1, pp. 15-22. https://doi.org/10.1016/j.frl.2004.10.002
    Lettau, Martin ; Ludvigson, Sydney. / tay's as good as cay : Reply. In: Finance Research Letters. 2005 ; Vol. 2, No. 1. pp. 15-22.
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