The Decline in Asset Return Predictability and Macroeconomic Volatility


  • Finance and Economics Discussion Series


  • We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982, and a significant decline in this predictability during the Great Moderation. These findings are robust to alternative empirical specifications and out-of-sample tests. We explore the predictability decline using a model that incorporates monetary policy and shocks with time-varying volatility. The decline is consistent with changes in both policy and shock dynamics. While an increase in the response to inflation in the interest-rate policy rule decreases volatility, more persistent and less volatile shocks explain the lower predictability.

fecha de publicación

  • 2017

Líneas de investigación

  • Asset Return Predictability
  • Great Moderation
  • Monetary Policy
  • Time-varying Macroeconomic Volatility


  • 2017-050