The Economic Value of Predicting Stock Index Returns and Volatility

Wessel Marquering and Marno Verbeek

Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: In this paper, we analyze the economic value of predicting index returns as well as volatility. On the basis of fairly simple linear models, estimated recursively, we produce genuine out-of-sample forecasts for the return on the S\&P 500 index and its volatility. Using monthly data from 1954 to 1998, we test the statistical significance of return and volatility predictability and examine the economic value of a number of alternative trading strategies. We find strong evidence for market timing in both returns and volatility. Joint tests indicate no dependence between return and volatility timing, while it appears easier to forecast returns when volatility is high. For a mean-variance investor, this predictability is economically profitable, even if short sales are not allowed and transaction costs are quite large.

Date: 2000-03
New Economics Papers: this item is included in nep-fmk and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
https://lirias.kuleuven.be/bitstream/123456789/501075/1/DPS0020.pdf

Related works:
Journal Article: The Economic Value of Predicting Stock Index Returns and Volatility (2004)
Working Paper: The Economic Value of Predicting Stock Index Returns and Volatility (2001)
Working Paper: The Economic Value of Predicting Stock Index Returns and Volatility (2000)
Working Paper: The Economic Value of Predicting Stock Index Returns and Volatility (2000)
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:ete:ceswps:ces0020

Access Statistics for this paper

More papers in Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven
Bibliographic data for series maintained by library EBIB ().