Indicator selection and stock return predictability

Zhifeng Dai and Huan Zhu

The North American Journal of Economics and Finance, 2021, vol. 57, issue C

Abstract: We propose a momentum-determined indicator-switching (MDIS) strategy, simple and effective, to improve the predictability of stock returns, which can effectively select predictors. Empirical results indicate that the stock return forecasts generated by the MDIS strategy are statistically and economically significant. And we find that super long-term momentum of predictability (SMoP) exists in predictive factors. That is, in a long period of time in the past, the best predictor among a series of factors has best prediction ability in the future. We also design restricted momentum-determined indicator-switching (RMDIS) strategy when considering economic constrain. It is robust for the prediction performance of this strategy using a series of extension and robustness test. Success of the RMDIS strategy is also seen in using technical indicators to forecast stock returns.

Keywords: Indicator selection; Momentum; Stock return predictability; Out-of-sample forecast (search for similar items in EconPapers)
JEL-codes: C22 G11 G12 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:57:y:2021:i:c:s1062940821000309

DOI: 10.1016/j.najef.2021.101394

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