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Title: Time-varying equity premium forecasts based on industry indexes
Authors: Silva, Nuno 
Keywords: Equity premium forecasts; Industry indexes; Regime switch; Portfolio choice
Issue Date: 2020
Publisher: Auckland Centre for Financial Research Faculty of Business and Law Auckland University of Technology
Serial title, monograph or event: Applied Finance Letters
Volume: 9
Place of publication or event: Auckland (New Zealand)
Abstract: 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
ISSN: 2253-5802
DOI: 10.24135/afl.v9i.298
Rights: openAccess
Appears in Collections:FEUC- Artigos em Revistas Internacionais
I&D CeBER - Artigos em Revistas Internacionais

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