Elusive return predictability: Discussion

Abstract

Two major conclusions follow from this very careful study. First, sophisticated prediction tools do not fare well relative to naive models predicting return based on past sample means. Second, there appear to be short-lived episodes of quite limited return predictability. These conclusions are consistent with all we know from the theoretical developments in financial economics over the past thirty five years and more. Yet how do we reconcile these facts with the widespread perception that market returns are in fact predictable, and that hedge funds in particular are adept at exploiting this predictability?