Economic uncertainty and time-varying return predictability

Li Liu

Finance Research Letters, 2024, vol. 68, issue C

Abstract: We propose a predictive regression for stock returns in which the parameter variation is driven by economic uncertainty. A locally weighted least squares approach is developed to obtain parameter estimates which are used to generate forecasts of returns for the S&P 500 index. Our results indicate that the time-varying parameter model accounting for the role of economic uncertainty (TVP-EU) significantly improves upon the standard ordinary least squares model and the historical average benchmark.

Keywords: Economic uncertainty; Equity premium; Weighted least squares; Cross-validation; Out-of-sample forecasting (search for similar items in EconPapers)
JEL-codes: G11 G14 G17 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:68:y:2024:i:c:s1544612324010559

DOI: 10.1016/j.frl.2024.106025

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