English, Article, Journal or magazine article edition: Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average? John Y. Campbell; Samuel B. Thompson

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Bookmark: http://trove.nla.gov.au/version/140839
Physical Description
  • preprint
Language
  • English

Edition details

Title
  • Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?
Author
  • John Y. Campbell
  • Samuel B. Thompson
Physical Description
  • preprint
Notes
  • RePEc:fth:harver:2084
  • A number of variables are correlated with subsequent returns on the aggregate US stock market in the 20th Century. Some of these variables are stock market valuation ratios, others reflect patterns in corporate finance or the levels of short- and long-term interest rates. Amit Goyal and Ivo Welch (2004) have argued that in-sample correlations conceal a systematic failure of these variables out of sample: None are able to beat a simple forecast based on the historical average stock return. In this note we show that forecasting variables with significant forecasting power in-sample generally have a better out-of-sample performance than a forecast based on the historical average return, once sensible restrictions are imposed on the signs of coefficients and return forecasts. The out-of-sample predictive power is small, but we find that it is economically meaningful. We also show that a variable is quite likely to have poor out-of-sample performance for an extended period of time even when the variable genuinely predicts returns with a stable coefficient.
  • RePEc:nbr:nberwo:11468
Language
  • English
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