Out-of-sample Predictability of the South African Equity Risk Premium Distribution: A Quantile Regression Approach

Munyaradzi Chawana, Ilse Botha and Yolanda Stander ()
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Yolanda Stander: S&P Global Ratings

The African Finance Journal, 2022, vol. 24, issue 2, 51-65

Abstract: This paper explores the out-of-sample predictability of the South African equity risk premium (ERP) distribution through a quantile regression framework. Empirical results show that beyond central quantiles, several predictor variables exhibit statistically and economically significant predictive ability, reinforcing evidence against the location shift hypothesis which proposes that predictor variables affect only the location of the ERP conditional distribution. Furthermore, combining out-ofsample forecasts from various parts of the ERP distribution, a robust out-of-sample approximation of the mean ERP is attained under a 5-quantile post- least absolute shrinkage and selection operator specification with a time-invariant weighting scheme.

Keywords: Quantile regression; Equity risk premium; Out-of-sample predictability; Forecast combination (search for similar items in EconPapers)
JEL-codes: E44 G11 G12 G17 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:afj:journl:v:24:y:2022:i:2:p:51-65

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