Does Debt Ceiling and Government Shutdown Help in Forecasting the US Equity Risk Premium?

Goodness C. Aye Author-Email: Goodness.aye@gmail.com and Rangan Gupta ()
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Goodness C. Aye Author-Email: Goodness.aye@gmail.com: Department of Economics, University of Pretoria, South Africa Author-Name: Frederick W. Deale Author-Email: dealed@lantic.net

Panoeconomicus, 2016, vol. 63, issue 3, 273-291

Abstract: This article evaluates the predictability of the equity risk premium in the United States by comparing the individual and complementary predictive power of macroeconomic variables and technical indicators using a compre- hensive set of 16 economic and 14 technical predictors over a monthly out-of- sample period of 1995:01 to 2012:12 and an in-sample period of 1986:01- 1994:12. In order to do so we consider, in addition to the set of variables used in Christopher J. Neely et al. (2013) and using a more recent dataset, the fore- casting ability of two other important variables namely government shutdown and debt ceiling. Our results show that one of the newly added variables name- ly government shutdown provides statistically significant out-of-sample predic- tive power over the equity risk premium relative to the historical average. Most of the variables, including government shutdown, also show significant eco- nomic gains for a risk averse investor especially during recessions.

Keywords: Equity risk premium forecasting; Debt ceiling; Government shut- down; Out-of-sample forecasts; Asset allocation (search for similar items in EconPapers)
JEL-codes: C38 C53 C58 E32 G11 G12 G17 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Does Debt Ceiling and Government Shutdown Help in Forecasting the US Equity Risk Premium? (2014)
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