Download or read book The Declining Asset Return Predictability and Macroeconomic Volatility written by Alex Hsu and published by . This book was released on 2017 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: We document strong U.S. stock and bond return predictability from several macroeconomic volatility series before 1982. Return predictability declined significantly during the Great Moderation in the post-1982 sample. Our empirical finding is robust to out-of-sample "real time" forecasts in terms of root mean square errors. We explore this result using a model incorporating monetary policy and shocks with time-varying volatility. The predictability 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 shocks with reduced volatility explain the lower predictability.