Abstract: | In this article we examine the structural stability of predictiveregression models of U.S. quarterly aggregate real stock returnsover the postwar era. We consider predictive regressions modelsof S&P 500 and CRSP equal-weighted real stock returns basedon eight financial variables that display predictive abilityin the extant literature. We test for structural stability usingthe popular Andrews SupF statistic and the Bai subsample procedurein conjunction with the Hansen heteroskedastic fixed-regressorbootstrap. We also test for structural stability using the recentlydeveloped methodologies of Elliott and Müller, and Baiand Perron. We find strong evidence of structural breaks infive of eight bivariate predictive regression models of S&P500 returns and some evidence of structural breaks in the threeother models. There is less evidence of structural instabilityin bivariate predictive regression models of CRSP equal-weightedreturns, with four of eight models displaying some evidenceof structural breaks. We also obtain evidence of structuralinstability in a multivariate predictive regression model ofS&P 500 returns. When we estimate the predictive regressionmodels over the different regimes defined by structural breaks,we find that the predictive ability of financial variables canvary markedly over time. |