Title: Understanding stock return predictability
Description: "Finance theory, e.g., Campbell's (1993) ICAPM, indicates that the expected equity premium is a linear function of stock market volatility and the volatility of shocks to investment opportunities.  We show that one can use average CAPM-based idiosyncratic volatility as a proxy for the latter.  In particular, over the period 1927:Q1 to 2005:Q4, stock market volatility and idiosyncratic volatility jointly forecast stock market returns both in sample and out of sample.  This finding is robust to alternative measures of idiosyncratic volatility; subsamples; the log transformation of volatility measures; and control for various predictive variables commonly used by early authors.  Our results suggest that stock market returns are predictable"--Federal Reserve Bank of St. Louis web site.