Stock Return Predictability: Evaluation based on interval forecasts

This paper evaluates the predictability of monthly stock return using out-of-sample interval forecasts. Past studies exclusively use point forecasts, which are of limited value since they carry no information about intrinsic predictive uncertainty. We compare the empirical performance of alternative interval forecasts for stock return generated from a naïve model, univariate autoregressive model, and multivariate model (predictive regression and VAR), using U.S. data from 1926. It is found that neither univariate nor multivariate interval forecasts outperform naïve forecasts. This strongly suggests that the U.S. stock market has been informationally efficient in the weak-form as well as in the semi-strong form.