Equity premium prediction: keep it sophisticatedly simple

Quantitative Finance and Economics

Anwen Yin¹ 

[1] A.R. Sanchez, Jr. School of Business, Texas A & M International University, 5201 University Blvd, Laredo, TX 78041, USA;

关键词: equity premium;    forecast combination;    structural break;    averaging window;   

DOI  :  10.3934/QFE.2021012

来源: DOAJ

【 摘 要 】

Following the keep-it-sophisticatedly-simple principle, KISS, we propose using the averaging window approach to forecast the market equity premium in unstable environments. First, the estimation methodology of averaging window is a theoretically justified method robust to uncertainties on structural breaks and estimation window sizes. Second, the averaging window method has the obvious advantages of being understandable to forecast users and simple to implement, thus encouraging engagement and criticism. Our empirical results demonstrate the superior performance of the averaging window when forecasting the U.S. market equity premium, exceeding a wide range of methods which have been shown effective, such as shrinkage estimators and technical indicators.

【 授权许可】

Unknown