Forecasting stock market returns by summing the frequency-decomposed parts
Gonçalo Faria () and
Fabio Verona ()
No 29/2016, Research Discussion Papers from Bank of Finland
We generalize the Ferreira and Santa-Clara (2011) sum-of-the-parts method for forecasting stock market returns. Rather than summing the parts of stock returns, we suggest summing some of the frequency-decomposed parts. The proposed method signi cantly improves upon the original sum-of-the-parts and delivers statistically and economically gains over historical mean forecasts, with monthly out-of-sample R2 of 2.60% and annual utility gains of 558 basis points. The strong performance of this method comes from its ability to isolate the frequencies of the parts with the highest predictive power, and from the fact that the selected frequency-decomposed parts carry complementary information that captures di erent frequencies of stock market returns.
JEL-codes: G11 G12 G14 G17 (search for similar items in EconPapers)
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Published in Forthcoming in the Journal of Empirical Finance
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Journal Article: Forecasting stock market returns by summing the frequency-decomposed parts (2018)
Working Paper: Forecasting stock market returns by summing the frequency-decomposed parts (2017)
Working Paper: Forecasting stock market returns by summing the frequency-decomposed parts (2016)
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