October 8, 2020
We derive generalized bounds on conditional expected excess returns. The bounds deliver consistent expected returns for individual and index-type assets, are conditionally tight, account for all risk-neutral moments of returns, and outperform runner-up models for out-of-sample predictions. Bounds calibrated to realized returns correspond to reasonable risk aversion and prudence. On average, expected stock returns given by the bounds decrease on FOMC days and even weeks of the FOMC cycle. However, using a composite sensitivity index based on asset characteristics, we also identify stocks experiencing an increase in expected returns.