Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium?

Rangan Gupta, Shawkat Hammoudeh, Mampho Modise () and Duc Khuong Nguyen
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Mampho Modise: Department of Economics, University of Pretoria

No 201351, Working Papers from University of Pretoria, Department of Economics

Abstract: This article attempts to examine whether the equity premium in the United States can be predicted from a com-prehensive set of 18 economic and financial predictors over a monthly out-of-sample period of 2000:2 to 2011:12, using an in-sample period of 1990:2-2000:1. To do so, we consider, in addition to the set of variables used in Rapach and Zhou (2013), the forecasting ability of four other important variables: the US economic policy uncertainty, the equity market uncertainty, the University of Michigan’s index of consumer sentiment, and the Kansas City Fed’s financial stress index. Using a more recent dataset compared to that of Rapach and Zhou (2013), our results from predictive regressions show that the newly added variables do not play any sig-nificant statistical role in explaining the equity premium relative to the historical average benchmark over the out-of-sample horizon, even though they are believed to possess valuable informative content about the state of the economy and financial markets. Interestingly, however, barring the economic policy uncertainty index, the three other indexes considered in this study yields economically significant out-of-sample gains, especially during recessions, when compared to the historical benchmark.

Keywords: Equity premium forecasting; asset pricing model; economic uncertainty; business cycle (search for similar items in EconPapers)
JEL-codes: C22 C38 C53 C58 E32 G11 G12 G14 G17 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2013-09
New Economics Papers: this item is included in nep-for and nep-ore
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Related works:
Journal Article: Can economic uncertainty, financial stress and consumer sentiments predict U.S. equity premium? (2014)
Working Paper: Can Economic Uncertainty, Financial Stress and Consumer Senti-ments Predict U.S. Equity Premium? (2014)
Working Paper: Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium? (2013)
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