Forecasting Stock Returns
David Rapach and
Guofu Zhou
Chapter Chapter 6 in Handbook of Economic Forecasting, 2013, vol. 2, pp 328-383 from Elsevier
Abstract:
We survey the literature on stock return forecasting, highlighting the challenges faced by forecasters as well as strategies for improving return forecasts. We focus on U.S. equity premium forecastability and illustrate key issues via an empirical application based on updated data. Some studies argue that, despite extensive in-sample evidence of equity premium predictability, popular predictors from the literature fail to outperform the simple historical average benchmark forecast in out-of-sample tests. Recent studies, however, provide improved forecasting strategies that deliver statistically and economically significant out-of-sample gains relative to the historical average benchmark. These strategies – including economically motivated model restrictions, forecast combination, diffusion indices, and regime shifts – improve forecasting performance by addressing the substantial model uncertainty and parameter instability surrounding the data-generating process for stock returns. In addition to the U.S. equity premium, we succinctly survey out-of-sample evidence supporting U.S. cross-sectional and international stock return forecastability. The significant evidence of stock return forecastability worldwide has important implications for the development of both asset pricing models and investment management strategies.
Keywords: Equity premium; Economic variables; Technical indicators; Forecast combination; Diffusion index; Regime shifts; Asset pricing model; Asset allocation; Business cycle (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (317)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/B9780444536839000062
Full text for ScienceDirect subscribers only
Related works:
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:eee:ecofch:2-328
DOI: 10.1016/B978-0-444-53683-9.00006-2
Access Statistics for this chapter
More chapters in Handbook of Economic Forecasting from Elsevier
Bibliographic data for series maintained by Catherine Liu ().