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Stock index return forecasting: The information of the constituents

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  • Cai, Charlie X.
  • Kyaw, Khine
  • Zhang, Qi
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    Abstract

    We investigate whether the use of component forecasts improves the accuracy of a portfolio forecast which uses only aggregate data. The results show that the use of component data improves the accuracy of aggregate forecasts. Furthermore, the long–short trading strategy based on the component forecasts always generates substantially higher returns than the buy-and-hold strategy.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0165176512000304
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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 116 (2012)
    Issue (Month): 1 ()
    Pages: 72-74

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    Handle: RePEc:eee:ecolet:v:116:y:2012:i:1:p:72-74

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    Web page: http://www.elsevier.com/locate/ecolet

    Related research

    Keywords: Index forecasting; Portfolio strategy; Stock returns;

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    1. Hendry, David F. & Hubrich, Kirstin, 2006. "Forecasting economic aggregates by disaggregates," Working Paper Series 0589, European Central Bank.
    2. Hernandez-Murillo, Ruben & Owyang, Michael T., 2006. "The information content of regional employment data for forecasting aggregate conditions," Economics Letters, Elsevier, vol. 90(3), pages 335-339, March.
    3. Hendry, David F. & Hubrich, Kirstin, 2011. "Combining Disaggregate Forecasts or Combining Disaggregate Information to Forecast an Aggregate," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(2), pages 216-227.
    4. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
    5. Fok, D. & van Dijk, D.J.C. & Franses, Ph.H.B.F., 2004. "Forecasting aggregates using panels of nonlinear time series," Econometric Institute Research Papers EI 2004-44, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    6. Kanas, Angelos, 2001. "Neural Network Linear Forecasts for Stock Returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(3), pages 245-54, July.
    7. Jennifer L. Castle & David F. Hendry, 2010. "Nowcasting from disaggregates in the face of location shifts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 29(1-2), pages 200-214.
    8. Breen, William & Glosten, Lawrence R & Jagannathan, Ravi, 1989. " Economic Significance of Predictable Variations in Stock Index Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1177-89, December.
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