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Predictive ability of three different estimates of “cay” to excess stock returns - A comparative study Germany & U.S -

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  • Emara, Noha

Abstract

The results of (Lettau, M.; Ludvison, S.,(2001)) show that Cay-LL has a significant predictive power both in the in-sample and the out-of-sample forecast of excess return. Our study departs from Lettau, M.; Ludvison, S.,(2001) in adding and comparing other two estimates of “cay” namely “Cay-Ols’ and “Cay-Dls” besides “Cay-LL” for forecasting excess return in both Germany and U.S over the period 1969:2 to 2005:1. Using quarterly data for both Germany and U.S over the period 1969:2 to 2005:1. We find that Cay-Ols proved to have the strongest in-sample forecast and out-of-sample forecast of the nested models of excess stock returns over the treasury bill rate in the U.S. We also find that the three different methods of estimating cay, Cay-Ols, Cay-Dls and Cay-LL, do not have any significant effect in either the in-sample forecast or the out-of-sample forecast of nested models in Germany. Finally analyzing the out-of sample forecast of non-nested models, using the Diebold Mariano(DM) test, we find that for the case of U.S, Cay-ols, Cay-Dls or Cay-LL proved to have equal predictive accuracy. On the other hand for the case of Germany, neither Cay-Ols nor Cay-Dls have equal predictive accuracy when compared to Cay-LL.

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  • Emara, Noha, 2014. "Predictive ability of three different estimates of “cay” to excess stock returns - A comparative study Germany & U.S -," MPRA Paper 68686, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:68686
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    References listed on IDEAS

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    1. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-179, March.
    2. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
    3. Clark, Todd E. & McCracken, Michael W., 2001. "Tests of equal forecast accuracy and encompassing for nested models," Journal of Econometrics, Elsevier, vol. 105(1), pages 85-110, November.
    4. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-144, January.
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    More about this item

    Keywords

    Forecast; Excess Return; In-sample; Out-of-sample; Nested Forecast;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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