Stock market "prediction" models

Garry Shelley (), Anca Traian () and William Trainor Jr. ()
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Garry Shelley: East Tennessee State University
Anca Traian: East Tennessee State University
William Trainor Jr.: East Tennessee State University

Economics Bulletin, 2020, vol. 40, issue 2, 1548-1556

Abstract: This study compares the equity allocation model relative to the more popular PE, Shiller CAPE, yield spread, Fed Model, and Buffet's Ratio (Market Cap/GDP) to predict long-term stock market returns. Although all the variables are related to long-run stock returns, only equity allocation and yield spread have root mean square errors consistently lower than a simple moving average. A simple trading rule transferring wealth between equity and 10-year T-bonds demonstrates equity allocation performs best with a 1.3% annual outperformance relative to buy-and-hold from 1990 to 2018. However, the predictive ability of the ratio was not identified until 2013 and since then, the trading strategy has underperformed by 1.5% annually. Thus, despite equity allocation's initial glamour, its long-term predictive ability does not appear to be easily transformed into profitable trading.

Keywords: Market Forecasting; Equity Allocation; Shiller PE; Buffet Ratio; Fed Model (search for similar items in EconPapers)
JEL-codes: G1 (search for similar items in EconPapers)
Date: 2020-06-07
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