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)
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).