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Forecasting Equity Premium in a Panel of OECD Countries: The Role of Economic Policy Uncertainty

Christina Christou () and Rangan Gupta ()
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Christina Christou: Department of Banking & Financial Management, University of Pireaus, Greece

No 201622, Working Papers from University of Pretoria, Department of Economics

Abstract: This paper investigates whether the news-based measure of economic policy uncertainty (EPU) could help in forecasting the equity premium (excess returns) in ten (Canada, France, Germany, Italy, Japan, The Netherlands, South Korea, Spain, United Kingdom (UK), and United States (US)) Organization for Economic Co-operation and Development (OECD) countries. We analyze the monthly out-of-sample period of 2007:01-2014:12, given an in-sample period of 2003:03-2006:12, using panel data-based predictive frameworks, which controls for heterogeneity, cross-sectional dependence, persistence and endogeneity. Our results show that while, time series based predictive regression models fail to beat the benchmark of historical average, the panel data models consistently beat the benchmark in a statistically significant fashion. In general, our results highlight the importance of pooling information when trying to forecast excess stock returns based on a news-based measure of domestic EPU, as well as that of the US.

Keywords: Equity Premium; Economic Policy Uncertainty; OECD Countries; Panel Predictive Regressions (search for similar items in EconPapers)
JEL-codes: C33 C53 G1 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-for
Date: 2016-03
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