Long-Horizon Predictability: A Cautionary Tale

Long-horizon return regressions effectively have small sample sizes. Using overlapping long-horizon returns provides only marginal benefit. Adjustments for overlapping observations have greatly overstated t-statistics. The evidence from regressions at multiple horizons is often misinterpreted. As a result, much less statistical evidence of long-horizon return predictability exists than is implied by research, which casts doubt on claims about forecasts based on stock market valuations and factor timing.