 Predicting equity premium by conditioning on macroeconomic variables: A prediction selection strategy using the price of crude oilNima Nonejad Finance Research Letters, 2021, vol. 41, issue C Abstract: A growing number of studies use crude oil price measures possibly in combination with other financial and macroeconomic variables, such as the dividend yield and earnings-to-price ratio as predictors in econometric models to evaluate whether they improve the accuracy of equity premium point predictions out-of-sample. In this study, we suggest relying on widely used crude oil price measures not as regressors in our predictive model but rather using them to devise a prediction selection strategy. Particularly, we use the crude oil price measure of interest to select between predictions produced under the benchmark and the predictive model augmented with a financial or macroeconomic variable. Using this prediction selection strategy, we succeed in obtaining point prediction accuracy improvements close to 10% relative to the benchmark and commonly used alternatives. Keywords: Crude oil price; Equity premium prediction; Prediction selection (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:41:y:2021:i:c:s1544612320316068 DOI: 10.1016/j.frl.2020.101792 Access Statistics for this article Finance Research Letters is currently edited by R. Gençay More articles in Finance Research Letters from Elsevier |
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