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The Poor Predictive Performance of Asset Pricing Models

Published online by Cambridge University Press:  06 April 2009

Timothy Simin
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Abstract

This paper examines time-series forecast errors of expected returns from conditional and unconditional asset pricing models for portfolio and individual firm equity returns. A new result that increases predictive precision concerning model specification and forecasting is introduced. Conditional versions of the models generally produce higher mean squared errors than unconditional versions for step ahead prediction. This holds for individual firm data when the instruments are firm specific. Mean square forecast error decompositions indicate that the asset pricing models produce relatively unbiased predictions, but the variance is severe enough to ruin the step ahead predictive ability beyond that of a constant benchmark.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 2 , June 2008 , pp. 355 - 380
Copyright
Copyright © School of Business Administration, University of Washington 2008

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