Equity Premium Prediction: Are Economic and Technical Indicators Unstable?

Fabian Baetje and Lukas Menkhoff

No 1552, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We show that technical indicators deliver stable economic value in predicting the U.S. equity premium over the out-of-sample period from 1966 to 2014. Results tentatively improve over time and beat alternatives over a large continuum of sub-periods. By contrast, economic indicators work well only until the 1970s, but thereafter they lose predictive power, even when the last crisis is considered. Translating the predictive power of technical indicators into a standard investment strategy delivers an annualized average Sharpe ratio of 0.55 p.a. (after transaction costs) for investors who had entered the market at any point in time.

Keywords: Equity premium predictability; economic indicators; technical indicators; break tests (search for similar items in EconPapers)
JEL-codes: G12 G17 (search for similar items in EconPapers)
Pages: 47 p.
Date: 2016
New Economics Papers: this item is included in nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Related works:
Journal Article: Equity premium prediction: Are economic and technical indicators unstable? (2016)
Working Paper: Equity premium prediction: Are economic and technical indicators instable? (2015)
Working Paper: Equity premium prediction: Are economic and technical indicators instable? (2015)
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