Asset Returns Under Model Uncertainty: Eveidence from the euro area, the U.K and the U.S

João Sousa () and Ricardo Sousa

No 21/2011, NIPE Working Papers from NIPE - Universidade do Minho

Abstract: The goal of thes paper is to analyze predictability of future asset returns in the context of model uncertainty. Using data for the euro area, the US and the U.K., we show that one can improve the forecasts of stock returns using a Bayesian Model Averaging (BMA) approach, and there is a large amount of model uncertainty. The empirical evidence for the euro area suggests that several macroeconomic, financial and macro-financial variables are consistently among the most prominent determinants of risk premium. As for the U.S, only a few number of predictors play an important role. In the case of the UK, future stock returns are better forecasted by financial variables. These results are corroborated for both the M-open and the M-closed perspectives and in the context of "in-sample" and "out-of-sample" forescating. Finally, we highlight that the predictive ability of the BMA framework is stronger at longer periods, and clearly outperforms the constant expected returns and the autoregressive benchmark models.

Keywords: stock returns; model uncertainty; Bayesian Model Averaging (search for similar items in EconPapers)
JEL-codes: E21 E44 G11 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-cba, nep-eec, nep-for and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www3.eeg.uminho.pt/economia/nipe/docs/2011/NIPE_WP_21_2011.pdf (application/pdf)

Related works:
Working Paper: Asset Returns Under Model Uncertainty: Evidence from the euro area, the U.K. and the U.S (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nip:nipewp:21/2011

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in NIPE Working Papers from NIPE - Universidade do Minho Núcleo de Investigação em Políticas Económicas e Empresariais, Escola de Economia e Gestão, Universidade do Minho, P-4710-057 Braga, Portugal. Contact information at EDIRC.
Bibliographic data for series maintained by NIPE ().