Modeling stock index returns by means of partial least‐squares methods: An out‐of‐sample analysis for three stock markets

Cetin‐Behzet Cengiz and Helmut Herwartz

Applied Stochastic Models in Business and Industry, 2011, vol. 27, issue 3, 253-266

Abstract: We analyze the underlying economic forces of the stock markets in Germany, the U.K. and the U.S. Identifying a number of variables evincing return predictability, we follow a partial least‐squares (PLS) approach to combine these observables into a few latent factors. Conditional on European markets, our findings indicate (i) superior prediction performance of PLS‐based schemes in comparison with both, a random walk and a first‐order autoregressive benchmark model, (ii) consistent profitable trading on the German and British market, (iii) profitable linear forecast combinations, (iv) the U.S. stock market is diagnosed as informationally efficient. Copyright © 2010 John Wiley & Sons, Ltd.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:wly:apsmbi:v:27:y:2011:i:3:p:253-266

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