Do Combination Forecasts Outperform the Historical Average? Economic and Statistical Evidence

Apostolos Thomadakis

MPRA Paper from University Library of Munich, Germany

Abstract: This paper examines the out-of-sample predictability of monthly German stock returns, and addresses the issue of whether combinations of individual model forecasts are able to provide significant out-of-sample gains relative to the historical average. Empirical analysis over the period from 1973 to 2012 implies that firstly, the term spread has the in-sample ability to predict stock returns, secondly, and most importantly, this variable successfully delivers consistent out-of-sample forecast gains relative to the historical average, and thirdly, combination forecasts do not appear to offer a significant evidence of consistently beating the historical average forecasts of the stock returns. Results are robust using both statistical and economic criteria, and hold across different out-of-sample forecast evaluation periods.

Keywords: Equity Premium; Forecast Combination; Out-of-Sample Forecast; Mean-Variance Investor (search for similar items in EconPapers)
JEL-codes: C22 C32 C53 G11 G17 (search for similar items in EconPapers)
Date: 2016-05-20
New Economics Papers: this item is included in nep-for, nep-his and nep-ore
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:71589

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