Time-varying equity premium forecasts based on industry indexes
Autor(a) principal: | |
---|---|
Data de Publicação: | 2020 |
Tipo de documento: | Artigo |
Idioma: | eng |
Título da fonte: | Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
Texto Completo: | http://hdl.handle.net/10316/94902 https://doi.org/10.24135/afl.v9i.298 |
Resumo: | Various studies report that the ability of industry indexes to predict the broad market disappeared during the most recent years. I revisit this theme using more flexible switching models and imposing economically motivated constraints on the predictions. My results show that traditional constant coefficients linear models are unable to forecast the stock market over the period considered, but restricting the equity premium to be non-negative, five industries predict the market. I also show that the Markov-switching models exhibit a dismal performance, which is even worse than the ones from the constant coefficients model. Finally, I test a model with two regimesrecession and expansion- which are identified in real-time through the AroubaDiebold-Scotti Business Conditions Index. Using this model, I find that 8 out of 33 industries can successfully forecast the market. Furthermore, a mean-variance investor who bases his decisions on it obtains sizeable utility gains, relative to another investor who uses, exclusively, the historical returns |
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Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
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Time-varying equity premium forecasts based on industry indexesEquity premium forecastsIndustry indexesRegime switchPortfolio choiceVarious studies report that the ability of industry indexes to predict the broad market disappeared during the most recent years. I revisit this theme using more flexible switching models and imposing economically motivated constraints on the predictions. My results show that traditional constant coefficients linear models are unable to forecast the stock market over the period considered, but restricting the equity premium to be non-negative, five industries predict the market. I also show that the Markov-switching models exhibit a dismal performance, which is even worse than the ones from the constant coefficients model. Finally, I test a model with two regimesrecession and expansion- which are identified in real-time through the AroubaDiebold-Scotti Business Conditions Index. Using this model, I find that 8 out of 33 industries can successfully forecast the market. Furthermore, a mean-variance investor who bases his decisions on it obtains sizeable utility gains, relative to another investor who uses, exclusively, the historical returnsAuckland Centre for Financial Research Faculty of Business and Law Auckland University of Technology2020info:eu-repo/semantics/publishedVersioninfo:eu-repo/semantics/articlehttp://hdl.handle.net/10316/94902http://hdl.handle.net/10316/94902https://doi.org/10.24135/afl.v9i.298eng2253-58022253-5799Silva, Nunoinfo:eu-repo/semantics/openAccessreponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãoinstacron:RCAAP2022-05-25T05:15:47Zoai:estudogeral.uc.pt:10316/94902Portal AgregadorONGhttps://www.rcaap.pt/oai/openaireopendoar:71602024-03-19T21:13:31.785765Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informaçãofalse |
dc.title.none.fl_str_mv |
Time-varying equity premium forecasts based on industry indexes |
title |
Time-varying equity premium forecasts based on industry indexes |
spellingShingle |
Time-varying equity premium forecasts based on industry indexes Silva, Nuno Equity premium forecasts Industry indexes Regime switch Portfolio choice |
title_short |
Time-varying equity premium forecasts based on industry indexes |
title_full |
Time-varying equity premium forecasts based on industry indexes |
title_fullStr |
Time-varying equity premium forecasts based on industry indexes |
title_full_unstemmed |
Time-varying equity premium forecasts based on industry indexes |
title_sort |
Time-varying equity premium forecasts based on industry indexes |
author |
Silva, Nuno |
author_facet |
Silva, Nuno |
author_role |
author |
dc.contributor.author.fl_str_mv |
Silva, Nuno |
dc.subject.por.fl_str_mv |
Equity premium forecasts Industry indexes Regime switch Portfolio choice |
topic |
Equity premium forecasts Industry indexes Regime switch Portfolio choice |
description |
Various studies report that the ability of industry indexes to predict the broad market disappeared during the most recent years. I revisit this theme using more flexible switching models and imposing economically motivated constraints on the predictions. My results show that traditional constant coefficients linear models are unable to forecast the stock market over the period considered, but restricting the equity premium to be non-negative, five industries predict the market. I also show that the Markov-switching models exhibit a dismal performance, which is even worse than the ones from the constant coefficients model. Finally, I test a model with two regimesrecession and expansion- which are identified in real-time through the AroubaDiebold-Scotti Business Conditions Index. Using this model, I find that 8 out of 33 industries can successfully forecast the market. Furthermore, a mean-variance investor who bases his decisions on it obtains sizeable utility gains, relative to another investor who uses, exclusively, the historical returns |
publishDate |
2020 |
dc.date.none.fl_str_mv |
2020 |
dc.type.status.fl_str_mv |
info:eu-repo/semantics/publishedVersion |
dc.type.driver.fl_str_mv |
info:eu-repo/semantics/article |
format |
article |
status_str |
publishedVersion |
dc.identifier.uri.fl_str_mv |
http://hdl.handle.net/10316/94902 http://hdl.handle.net/10316/94902 https://doi.org/10.24135/afl.v9i.298 |
url |
http://hdl.handle.net/10316/94902 https://doi.org/10.24135/afl.v9i.298 |
dc.language.iso.fl_str_mv |
eng |
language |
eng |
dc.relation.none.fl_str_mv |
2253-5802 2253-5799 |
dc.rights.driver.fl_str_mv |
info:eu-repo/semantics/openAccess |
eu_rights_str_mv |
openAccess |
dc.publisher.none.fl_str_mv |
Auckland Centre for Financial Research Faculty of Business and Law Auckland University of Technology |
publisher.none.fl_str_mv |
Auckland Centre for Financial Research Faculty of Business and Law Auckland University of Technology |
dc.source.none.fl_str_mv |
reponame:Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) instname:Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação instacron:RCAAP |
instname_str |
Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
instacron_str |
RCAAP |
institution |
RCAAP |
reponame_str |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
collection |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) |
repository.name.fl_str_mv |
Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos) - Agência para a Sociedade do Conhecimento (UMIC) - FCT - Sociedade da Informação |
repository.mail.fl_str_mv |
|
_version_ |
1799134030449344512 |