Short-Term Exuberance and long-term stability: A simultaneous optimization of stock return predictions for short and long horizons

Ioannis Kyriakou (), Parastoo Mousavi (), Jens Perch Nielsen () and Michael Scholz ()
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Ioannis Kyriakou: Cass Business School, City, University of London, UK
Parastoo Mousavi: Cass Business School, City, University of London, UK
Jens Perch Nielsen: Cass Business School, City, University of London, UK
Michael Scholz: University of Graz, Austria

No 2020-20, Graz Economics Papers from University of Graz, Department of Economics

Abstract: The fundamental interest of investors in econometric modelling for excess stock returns usually focuses either on short- or long-term predictions to reduce individually the investment risk. In this paper, we present a new simple model that accounts contemporaneously for short- and long-term predictions. By combining the different horizons, we can exploit the lower long-term variance to further reduce the short-term variance which is susceptible to speculative exuberance. Different combinations of short and long horizons as well as definitions of excess returns, for example, concerning the traditional short-term interest rate but also the inflation, are easily accommodated in our model. We show that the estimated relationship between excess stock returns and the predictive variables under the inflation benchmark is stable across different horizons, which is especially important for long-term real savings for pension products. We conclude the paper with a study of stock market predictions during the recent Covid-19 pandemic.

Keywords: Finance; Investment analysis; Stock returns; Cross-validation; Variation reduction. (search for similar items in EconPapers)
JEL-codes: C14 C53 C58 G17 G22 (search for similar items in EconPapers)
Date: 2020-12
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