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Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis

Stelios Bekiros, Rangan Gupta () and Anandamayee Majumdar

Finance Research Letters, 2016, vol. 18, issue C, 291-296

Abstract: Information on economic policy uncertainty does matter in predicting the US equity premium, especially when accounting for structural instabilities and omitted nonlinearities in their relationship, via a quantile predictive regression approach over the monthly period 1900:1–2014:2. Unlike as suggested by a linear mean-based predictive model, the extended quantile regression model with the incorporation of the EPU proxy, enhances significantly the out-of-sample stock return predictability. This is observed especially when the market is neutral, exhibits a slide or mildly upward trending behavior, yet not when the market appears to turn highly bullish.

Keywords: Stock markets; Economic uncertainty; Predictability; Quantile regression (search for similar items in EconPapers)
JEL-codes: C22 C53 E60 G10 (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: Incorporating Economic Policy Uncertainty in US Equity Premium Models: A Nonlinear Predictability Analysis (2015)
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