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Incorporating Economic Policy Uncertainty in US Equity Premium Models: A Nonlinear Predictability Analysis

Stelios Bekiros, Rangan Gupta () and Anandamayee Majumdar

No 201545, Working Papers from University of Pretoria, Department of Economics

Abstract: Information on economic policy uncertainty does matter in predicting the US equity premium, especially when accounting for structural instabilities and omitted nonlinearities in their relationship, via a quantile predictive regression approach over the monthly period 1900:1-2014:2. Unlike as suggested by a linear mean-based predictive model, the extended quantile regression model with the incorporation of the EPU proxy, enhances significantly the out-of-sample stock return predictability. This is observed especially when the market is neutral, exhibits a side or mildly upward trending behavior, yet not when the market appears to turn highly bullish.

Keywords: stock markets; economic uncertainty; predictability; quantile regression (search for similar items in EconPapers)
JEL-codes: C22 C53 E60 G10 (search for similar items in EconPapers)
Pages: 10 pages
Date: 2015-06
New Economics Papers: this item is included in nep-for and nep-mac
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Journal Article: Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis (2016) Downloads
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