Time-frequency forecast of the equity premium

Gonçalo Faria and Fabio Verona

Quantitative Finance, 2021, vol. 21, issue 12, 2119-2135

Abstract: Any time series can be decomposed into cyclical components fluctuating at different frequencies. Accordingly, in this paper, we propose a method to forecast the equity premium which exploits the frequency relationship between the equity premium and several predictor variables. We evaluate a large set of models and find that, by selecting the relevant frequencies for equity premium forecasting purposes, this method significantly improves in a statistical and economic way upon standard time series forecasting methods. This outperformance is robust regardless of the predictor used, the out-of-sample period considered, and the frequency of the data used.

Date: 2021
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DOI: 10.1080/14697688.2020.1820071

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