Short-Term Exuberance and Long-Term Stability: A Simultaneous Optimization of Stock Return Predictions for Short and Long Horizons

Ioannis Kyriakou, Parastoo Mousavi, Jens Perch Nielsen and Michael Scholz
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Ioannis Kyriakou: Faculty of Actuarial Science and Insurance, Cass Business School, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK
Parastoo Mousavi: Faculty of Actuarial Science and Insurance, Cass Business School, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK
Jens Perch Nielsen: Faculty of Actuarial Science and Insurance, Cass Business School, University of London, 106 Bunhill Row, London EC1Y 8TZ, UK
Michael Scholz: Department of Economics, University of Graz, Universitätsstraße 15/F4, 8010 Graz, Austria

Mathematics, 2021, vol. 9, issue 6, 1-19

Abstract: The fundamental interest of investors in econometric modeling for excess stock returns usually focuses either on short- or long-term predictions to individually reduce the investment risk. In this paper, we present a new and simple model that contemporaneously accounts for short- and long-term predictions. By combining the different horizons, we exploit the lower long-term variance to further reduce the short-term variance, which is susceptible to speculative exuberance. As a consequence, the long-term pension-saver avoids an over-conservative portfolio with implied potential upside reductions given their optimal risk appetite. Different combinations of short and long horizons as well as definitions of excess returns, for example, concerning the traditional short-term interest rate but also the inflation, are easily accommodated in our model.

Keywords: finance; investment analysis; stock returns; cross-validation; variation reduction (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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