To Predict the Equity Market, Consult Economic Theory

Davide Pettenuzzo ()

No 8, Rosenberg Global Financial Briefs from Brandeis University, Rosenberg Institute of Global Finance, International Businesss School

Abstract: Despite more than half a century of research on forecasting stock market returns, most predictive models perform quite poorly when they are put to the test of actually predicting equity returns. In fact, many authors, including Bossaerts and Hillion (1999), Brennan and Xia (2005), and Welch and Goyal (2008) suggest that equity returns cannot be predicted at all. This brief proposes a simple yet very effective solution to improve the quality of stock return predictions by taking economic theory into account.

Keywords: Economic constraints; Sharpe ratio, Equity premium predictions; Bayesian analysis (search for similar items in EconPapers)
JEL-codes: C11 C22 G11 G12 (search for similar items in EconPapers)
Pages: 5 pages
Date: 2013, Revised 2014
New Economics Papers: this item is included in nep-cfn, nep-for and nep-hpe
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Persistent link: https://EconPapers.repec.org/RePEc:bui:rosgfb:08

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