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Asset returns under model uncertainty: evidence from the euro area, the U.S. and the U.K

João Sousa () and Ricardo Sousa ()

No 1575, Working Paper Series from European Central Bank

Abstract: The goal of this paper is to analyze predictability of future asset returns in the context of model uncertainty. Using data for the euro area, the US and the U.K., we show that one can improve the forecasts of stock returns using a model averaging approach, and there is a large amount of model uncertainty. The empirical evidence for the euro area suggests that several macroeconomic, financial and macro-financial variables are consistently among the most prominent determinants of the risk premium. As for the US, only a few predictors play an important role. In the case of the UK, future stock returns are better forecast by financial variables. JEL Classification: E21, G11, E44

Keywords: Bayesian model averaging; model uncertainty; Stock returns (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-for
Note: 105709
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Journal Article: Asset Returns Under Model Uncertainty: Evidence from the Euro Area, the US and the UK (2019) Downloads
Working Paper: Asset Returns Under Model Uncertainty: Evidence from the euro area, the U.K. and the U.S (2011) Downloads
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