Predicting the direction of US stock markets using industry returns

Harri Pönkä

Empirical Economics, 2017, vol. 52, issue 4, No 13, 1480 pages

Abstract: Abstract In this paper, we examine the directional predictability of US excess stock market returns by lagged excess returns from industry portfolios and a number of other commonly used variables by means of dynamic probit models. We focus on the directional component of the market returns because, for investment purposes, forecasting the direction of return correctly is presumably more relevant than the accuracy of point forecasts. Our findings suggest that only a small number of industries have predictive power for market returns, meaning that we find little evidence of stock markets reacting with a delay to information contained in industry returns. We also find that the binary response models outperform conventional predictive regressions in forecasting the direction of the market return. Finally, we test trading strategies and find that some of the industry portfolios do contain information that can be used to improve investment returns.

Keywords: Industry excess return; Sign prediction; Probit model; Forecasting (search for similar items in EconPapers)
JEL-codes: C25 C53 C58 G17 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://link.springer.com/10.1007/s00181-016-1098-0 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
Working Paper: Predicting the direction of US stock markets using industry returns (2014)
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:spr:empeco:v:52:y:2017:i:4:d:10.1007_s00181-016-1098-0

Ordering information: This journal article can be ordered from
http://www.springer. ... rics/journal/181/PS2

DOI: 10.1007/s00181-016-1098-0

Access Statistics for this article

Empirical Economics is currently edited by Robert M. Kunst, Arthur H.O. van Soest, Bertrand Candelon, Subal C. Kumbhakar and Joakim Westerlund

More articles in Empirical Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().