Forecasting the Equity Risk Premium: The Role of Technical Indicators

Christopher Neely, David E. Rapach Author Email:rapachde@slu.edu, Jun Tu () and Guofu Zhou
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David E. Rapach Author Email:rapachde@slu.edu: Saint Louis University

Working Papers from Singapore Management University, Sim Kee Boon Institute for Financial Economics

Abstract: While macroeconomic variables have been used extensively to forecast the U.S. equity risk premium and build models to explain it, relatively little attention has been paid to the technical stock market indicators widely employed by practitioners. Our paper fills this gap by studying the forecasting ability of a variety of technical indicators in comparison to that of a number of well-known macroeconomic variables from the literature. We find that technical indicators have statistically and economically significant out-of-sample forecasting power and can be as useful as macroeconomic variables. Out-of-sample predictability is closely connected to the business cycle for both technical indicators and macroeconomic variables, although in a com- plementary manner: technical indicators detect the typical decline in the equity risk premium near cyclical peaks, while macroeconomic variables more readily pick up the typical rise near cyclical troughs. We further show that utilizing information from both technical indicators and macroeconomic variables substantially increases the out-of-sample gains relative to using either macroeconomic variables or technical indicators alone.

Keywords: Equity risk premium predictability; Macroeconomic variables; Moving-average rules; Momentum; Volume; Out-of-sample forecasts; Asset allocation; Mean-variance in- vestor; Business cycle; Principal components (search for similar items in EconPapers)
JEL-codes: C53 C58 E32 G11 G12 G17 (search for similar items in EconPapers)
Pages: 44 Pages
Date: 2011-04
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Citations: View citations in EconPapers (15)

Published in SMU-SKBI CoFie Working Paper

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Related works:
Journal Article: Forecasting the Equity Risk Premium: The Role of Technical Indicators (2014)
Working Paper: Out-of-sample equity premium prediction: economic fundamentals vs. moving-average rules (2010)
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