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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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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. 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.
  2. John Y. Campbell & Samuel B. Thompson, 2005. "Predicting the Equity Premium Out of Sample: Can Anything Beat the Historical Average?," NBER Working Papers 11468, National Bureau of Economic Research, Inc.
  3. Ivo Welch & Amit Goyal, 2008. "A Comprehensive Look at The Empirical Performance of Equity Premium Prediction," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1455-1508, July.
  4. Campbell, John & Yogo, Motohiro, 2006. "Efficient tests of stock return predictability," Scholarly Articles 3122601, Harvard University Department of Economics.
  5. Amit Goyal & Ivo Welch, 2003. "Predicting the Equity Premium with Dividend Ratios," Management Science, INFORMS, vol. 49(5), pages 639-654, May.
  6. 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.
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Cited by:
  1. Laurence Fung & Ip-wing Yu, 2008. "Predicting Stock Market Returns by Combining Forecasts," Working Papers 0801, Hong Kong Monetary Authority.
  2. Lubos Pástor & Robert F. Stambaugh, 2009. "Predictive Systems: Living with Imperfect Predictors," Journal of Finance, American Finance Association, vol. 64(4), pages 1583-1628, 08.
  3. Jonsson, Thomas & Österholm, Pär, 2009. "The Properties of Survey-Based Inflation Expectations in Sweden," Working Paper 114, National Institute of Economic Research.

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