hero working papers

The scale of predictability

Number: 509
Year: 2014
Author(s): Federico M. Bandi, Bernard Perron, Andrea Tamoni, and Claudio Tebaldi
We view economic time series as the result of a cascade of shocks occurring at different times and different frequencies (scales). We suggest that economic relations that are found to be elusive when using raw data may hold true for different layers (details) in the cascade of economic shocks. This observation leads to a notion of a scale-specific predictability. Using direct extraction of the details and two-way aggregation, we provide strong evidence of risk compensations in market returns, as well as of an unusually clear link between macroeconomic uncertainty and uncertainty in financial markets, at frequencies lower than the business cycle.

Keywords: long run, predictability, aggregation, risk-return trade-off, Fisher hypothesis
JEL codes: C22, E32, E44, G12, G17