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Forecasting Stock Returns Using Model‐Selection Criteria

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  • JAMIE ALCOCK
  • PHILIP GRAY

Abstract

This paper examines the economic significance of return predictability in Australian equities. In light of considerable model uncertainty, formal model‐selection criteria are used to choose a specification for the predictive model. A portfolio‐switching strategy is implemented according to model predictions. Relative to a buy‐and‐hold market investment, the returns to the portfolio‐switching strategy are impressive under several model‐selection criteria, even after accounting for transaction costs. However, as these findings are not robust across other model‐selection criteria examined, it is difficult to conclude that the degree of return predictability is economically significant.

Suggested Citation

  • Jamie Alcock & Philip Gray, 2005. "Forecasting Stock Returns Using Model‐Selection Criteria," The Economic Record, The Economic Society of Australia, vol. 81(253), pages 135-151, June.
    • Handle: RePEc:bla:ecorec:v:81:y:2005:i:253:p:135-151
    DOI: 10.1111/j.1475-4932.2005.00239.x
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    References listed on IDEAS

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    Cited by:

    1. Pierdzioch, Christian & Risse, Marian & Rohloff, Sebastian, 2014. "The international business cycle and gold-price fluctuations," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 292-305.
    2. Jurdi, Doureige J., 2022. "Predicting the Australian equity risk premium," Pacific-Basin Finance Journal, Elsevier, vol. 71(C).
    3. Yiwen (Paul) Dou & David R. Gallagher & David Schneider & Terry S. Walter, 2012. "Out-of-sample stock return predictability in Australia," Australian Journal of Management, Australian School of Business, vol. 37(3), pages 461-479, December.
    4. Philip Gray, 2008. "Economic significance of predictability in Australian equities," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 48(5), pages 783-805, December.
    5. Christian Pierdzioch & Marian Risse & Sebastian Rohloff, 2016. "Fluctuations of the real exchange rate, real interest rates, and the dynamics of the price of gold in a small open economy," Empirical Economics, Springer, vol. 51(4), pages 1481-1499, December.
    6. Christian Pierdzioch & Daniel Hartmann, 2013. "Forecasting Eurozone real-estate returns," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1185-1196, July.

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