Equity Premium Prediction: The Role of Economic and Statistical Constraints

Jiahan Li () and Ilias Tsiakas
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Jiahan Li: University of Notre Dame, USA

Working Paper series from Rimini Centre for Economic Analysis

Abstract: This paper shows that the equity premium is predictable out of sample when we use a predictive regression that conditions on a large set of economic fundamentals, subject to: (i) economic constraints on the sign of coefficients and return forecasts, and (ii) statistical constraints imposed by shrinkage estimation. Equity premium predictability delivers a certainty equivalent return of about 2:7% per year over the benchmark for a mean-variance investor. Our predictive framework outperforms a large group of competing models that also condition on economic fundamentals as well as models that condition on technical indicators.

Keywords: Equity Premium; Out-of-Sample Prediction; Economic Fundamentals; Technical Indicators; Shrinkage Estimation (search for similar items in EconPapers)
JEL-codes: G11 G14 G17 (search for similar items in EconPapers)
Date: 2016-09
New Economics Papers: this item is included in nep-fmk and nep-for
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.rcea.org/RePEc/pdf/wp16-25.pdf

Related works:
Journal Article: Equity premium prediction: The role of economic and statistical constraints (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:rim:rimwps:16-25

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