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Choice of Benchmark When Forecasting Long-term Stock Returns

Ioannis Kyriakou (), Parastoo Mousavi (), Jens Perch Nielsen () and Michael Scholz ()
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Ioannis Kyriakou: Cass Business School, City, University of London, UK
Parastoo Mousavi: Cass Business School, City, University of London, UK
Jens Perch Nielsen: Cass Business School, City, University of London, UK
Michael Scholz: University of Graz, Austria

No 2018-08, Graz Economics Papers from University of Graz, Department of Economics

Abstract: Recent advances in pension product development seem to favour alternatives to the risk free asset so often used in financial theory. In this paper, we investigate other benchmarks of the financial model than the classical risk free asset; for example, a benchmark following an inflation index is just one important case. Modelling extra returns above the inflation of risky assets is important, for example, for actuarial applications aiming at providing real income forecasts for pensioners. We study market timing when three alternative benchmarks are considered: the risk free rate, inflation and the long bond yield. We conclude that forecasting future stock returns is of similar complexity for all three considered benchmarks. From a pension fund modelling perspective, it therefore seems that one should use the most convenient benchmark for the problem at hand.

Keywords: Benchmark; Cross validation; Prediction; Stock returns (search for similar items in EconPapers)
JEL-codes: C14 C53 C58 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-age and nep-for
Date: 2018-04
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