We construct portfolios of stocks and bonds that are maximallypredictable with respect to a set of ex-ante observable economicvariables, and show that these levels of predictability arestatistically significant, even after controlling for data-snoopingbiases.We disaggregate the sources of predictability by usingseveral asset groups — sector portfolios, market-capitalizationportfolios, and stock/bond/utility portfolios — and find that thesources of maximal predictability shift considerably across assetclasses and sectors as the return horizon changes.Using threeout-of-sample measures of predictability — forecast errors, Merton'smarket-timing measure, and the profitability of asset-allocationstrategies based on maximizing predictability — we show that thepredictability of the maximally predictable portfolio is genuine andeconomically significant.

This book is an ambitious effort by three well-known andwell-respected scholars to fill an acknowledged void in theliterature—a text covering the burgeoning field of empirical finance.As the authors note in the preface, there are several excellent bookscovering financial theory at a level suitable for a Ph.D. class or asa reference for academics and practitioners, but there is little ornothing similar that covers econometric methods and applications.Perhaps the closest existing text is the recent addition to the WileySeries in Financial and Quantitative Analysis. written by Cuthbertson(1996). The major difference between the books is that Cuthbertsonfocuses exclusively on asset pricing in the stock, bond, and foreignexchange markets, whereas Campbell, Lo, and MacKinlay (henceforth CLM)consider empirical applications throughout the field of finance,including corporate finance, derivatives markets, and marketmicrostructure. The level of anticipation preceding publicationcan be partly measured by the fact that at least three reviews(including this one) have appeared since the book arrived. Moreover,in their reviews, both Harvey (1998) and Tiso (1998) comment on theneed for such a text, a sentiment that has been echoed by numerousfinance academics.