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Out-of-sample stock return predictability in Australia

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Author Info

  • Yiwen (Paul) Dou
  • David R. Gallagher

    (Macquarie Graduate School of Management, Sydney, Australia
    Capital Markets CRC Limited, Sydney, Australia)

  • David Schneider

    (UniSuper Management Limited, Melbourne, Australia)

  • Terry S. Walter

    (School of Finance, University of Technology, Sydney, Australia)

Abstract

We provide one of the first comprehensive studies on out-of-sample stock returns predictability in Australia. While most of the empirically well-known predictive variables fail to generate out-of-sample predictability, we document a significant out-of-sample prediction in forecasting ahead one-year and, to a lesser extent, one-quarter future excess returns, using a combination forecast of variables. We also find improved asset allocation using the combination forecast of these predictors. The combining methods are useful in predicting sector premia. Specifically, a sector rotation strategy relying on the combining methods outperforms the market by 3.27% per annum on a risk-adjusted basis.

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Bibliographic Info

Article provided by Australian School of Business in its journal Australian Journal of Management.

Volume (Year): 37 (2012)
Issue (Month): 3 (December)
Pages: 461-479

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Handle: RePEc:sae:ausman:v:37:y:2012:i:3:p:461-479

Contact details of provider:
Web page: http://www.agsm.edu.au

Related research

Keywords: combination forecasts; out-of-sample predictability; portfolio allocation; predictive regression; sector rotation;

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Cited by:
  1. repec:wyi:journl:002192 is not listed on IDEAS
  2. David R. Gallagher & Katja Ignatieva & James McCulloch, 2013. "Industry Concentration, Excess Returns and Innovation in Australia," Research Paper Series 334, Quantitative Finance Research Centre, University of Technology, Sydney.

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