Bagging Constrained Equity Premium Predictors

Tae Hwy Lee, Eric Hillebrand () and Marcelo Medeiros ()

No 201421, Working Papers from University of California at Riverside, Department of Economics

Abstract: The literature on excess return prediction has considered a wide array of estimation schemes, among them unrestricted and restricted regression coefficients. We consider bootstrap aggregation (bagging) to smooth parameter restrictions. Two types of restrictions are considered: positivity of the regression coefficient and positivity of the forecast. Bagging constrained estimators can have smaller asymptotic mean-squared prediction errors than forecasts from a restricted model without bagging. Monte Carlo simulations show that forecast gains can be achieved in realistic sample sizes for the stock return problem. In an empirical application using the data set of Campbell, J., and S. Thompson (2008): "Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?", Review of Financial Studies 21, 1511-1531, we show that we can improve the forecast performance further by smoothing the restriction through bagging.

Keywords: Constraints on predictive regression function; Bagging; Asymptotic MSE; Equity premium; Out-of-sample forecasting; Economic value functions. (search for similar items in EconPapers)
JEL-codes: C5 E4 G1 (search for similar items in EconPapers)
Pages: 30 Pages
Date: 2014-09, Revised 2013-02
New Economics Papers: this item is included in nep-ecm, nep-for and nep-mac
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Citations: View citations in EconPapers (3)

Published in Essays in Nonlinear Time Series Econometrics, Festschrift in Honor of Timo Teräsvirta, edited by Niels Haldrup, Mika Meitz, and Pentti Saikkonen. Oxford University Press. Chapter 14, pages 330-356. 2014.

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https://economics.ucr.edu/repec/ucr/wpaper/201421.pdf First version, 2014 (application/pdf)
https://economics.ucr.edu/repec/ucr/wpaper/201421R.pdf Revised version, 2013 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ucr:wpaper:201421

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