EconPapers    
Economics at your fingertips  
 

Forecasting stock market returns: The sum of the parts is more than the whole

Miguel Ferreira (miguel.ferreira@novasbe.pt) and Pedro Santa-Clara

Journal of Financial Economics, 2011, vol. 100, issue 3, 514-537

Abstract: We propose forecasting separately the three components of stock market returns--the dividend-price ratio, earnings growth, and price-earnings ratio growth--the sum-of-the-parts (SOP) method. Our method exploits the different time series persistence of the components and obtains out-of-sample R-squares (compared with the historical mean) of more than 1.3% with monthly data and 13.4% with yearly data. This compares with typically negative R-squares obtained in a similar experiment with predictive regressions. The performance of the SOP method comes mainly from the dividend-price ratio and earnings growth components, and the robustness of the method is due to its low estimation error. An investor who timed the market using our method would have had a Sharpe ratio gain of 0.3.

Keywords: Predictability; Stock; returns; Equity; premium; Predictive; regressions; Trading; strategies (search for similar items in EconPapers)
Date: 2011
References: Add references at CitEc
Citations: View citations in EconPapers (217)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304-405X(11)00036-5
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Forecasting Stock Market Returns: The Sum of the Parts is More than the Whole (2008) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:100:y:2011:i:3:p:514-537

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu (repec@elsevier.com).

 
Page updated 2024-12-28
Handle: RePEc:eee:jfinec:v:100:y:2011:i:3:p:514-537