Measuring the Predictable Variation in Stock and Bond Returns Chris Kirby Rice University University of Texas at Dallas Recent studies show that wben a regression model is used to forecast stock and bond returns, the sample R2 increases dramatically with the lengtb of tbe return borizon.Tbese studies ar- gue,tberefore,tbat long-borizon returns are bigbly predictable.Tbis article presents evidence that suggests otberwise.Long-borizon regres- sions can easily yield large values of tbe sam- ple R2,even if the population R2 is smallor zero. Moreover,long-borizon regressions with a small or zero population R2 can produce t-ratios tbat migbt be interpreted as evidence of strong pre- dictability.In general tbe analysis provides little support for the view that long-borizon returns are bigbly predictable. The theory that stock and bond markets process in- formation efficiently is a hallmark of modern finance. Although the traditional formulation of the efficient markets hypothesis rules out the ability to predict returns,most financial economists would probably agree that this view of efficiency is outdated.Recent A previous version of this article was circulated under the title "A Multivari- ate Analysis of the Predictable Variation in Stock and Bond Returns."The current version is based on ideas developed in my dissertation at Duke Uni- versity.I thank the members of my committee-Cam Harvey,David Hsieh, Tom Smith,George Tauchen,and Bob Whaley-for providing valuable support and suggestions.I also appreciate the comments and suggestions of Phillip Braun,Doug Foster,Andy Lo (the editor),Barbara Ostdiek,an anonymous referee,seminar participants at Duke University,and session participants at the 1993 meetings of the Western Finance Association.Part of this research was completed while the author was visiting the University of Michigan and the University of Maryland.Address correspondence to Chris Kirby,School of Management,University of Texas at Dallas,Richardson, TX75083-0688. The Review of Financtal Studies Fall 1997 Vol.10,No.3.pp.579-630 C 1997 The Review of Financial Studies 0893-9454/97/S1.50