Economically Significant Stock Market Forecasts

Rolando F Pelaez

The Financial Review, 1998, vol. 33, issue 1, 65-76

Abstract: It has been known for some time that a small, but statistically significant portion of the monthly variation in excess returns on the S&P 500-stock index is predictable using ex ante information. This paper presents a model whose out-of-sample forecasts have economic significance. Specifically, a switching rule conditioned on out-of-sample forecasts of stock excess returns, produces investment outcomes that mean-variance dominate the buy-and-hold. The switching strategy yields superior risk-adjusted returns as judged by the composite performance measures of Treynor, Sharpe, and Jensen. Copyright 1998 by MIT Press.

Date: 1998
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