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Should we expect significant out-of-sample results when predicting stock returns?

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Author Info

  • Erik Hjalmarsson

Abstract

Using Monte Carlo simulations, I show that typical out-of-sample forecast exercises for stock returns are unlikely to produce any evidence of predictability, even when there is in fact predictability and the correct model is estimated.

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File URL: http://www.federalreserve.gov/pubs/ifdp/2006/855/ifdp855.pdf
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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 855.

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Date of creation: 2006
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Handle: RePEc:fip:fedgif:855

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Related research

Keywords: Stock price forecasting;

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References

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  1. Amit Goyal & Ivo Welch, 1999. "Predicting the Equity Premium with Dividend Ratios," Yale School of Management Working Papers amz2437, Yale School of Management, revised 01 Nov 2002.
  2. Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
  3. Donald W.K. Andrews & Christopher J. Monahan, 1990. "An Improved Heteroskedasticity and Autocorrelation Consistent Covariance Matrix Estimator," Cowles Foundation Discussion Papers 942, Cowles Foundation for Research in Economics, Yale University.
  4. Campbell, John & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Scholarly Articles 3122601, Harvard University Department of Economics.
  5. John Y. Campbell & Samuel B. Thompson, 2005. "Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?," Harvard Institute of Economic Research Working Papers 2084, Harvard - Institute of Economic Research.
  6. Amit Goyal & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," Yale School of Management Working Papers amz2412, Yale School of Management, revised 01 Jan 2006.
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Cited by:
  1. Lubos Pastor & Robert F. Stambaugh, 2008. "Predictive Systems: Living with Imperfect Predictors," NBER Working Papers 13804, National Bureau of Economic Research, Inc.
  2. Thomas Jonsson & Pär Österholm, 2012. "The properties of survey-based inflation expectations in Sweden," Empirical Economics, Springer, vol. 42(1), pages 79-94, February.
  3. Laurence Fung & Ip-wing Yu, 2008. "Predicting Stock Market Returns by Combining Forecasts," Working Papers 0801, Hong Kong Monetary Authority.

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