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Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium?

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Author Info

  • Rangan Gupta

    ()
    (Department of Economics, University of Pretoria)

  • Shawkat Hammoudeh

    ()
    (Lebow College of Business, Drexel University, Philadelphia, USA)

  • Mampho P. Modise

    ()
    (Department of Economics, University of Pretoria)

  • Duc Khuong Nguyen

    ()
    (IPAG Lab, IPAG Business School, France)

Abstract

This article attempts to examine whether the equity premium in the United States can be predicted from a com-prehensive set of 18 economic and financial predictors over a monthly out-of-sample period of 2000:2 to 2011:12, using an in-sample period of 1990:2-2000:1. To do so, we consider, in addition to the set of variables used in Rapach and Zhou (2013), the forecasting ability of four other important variables: the US economic policy uncertainty, the equity market uncertainty, the University of Michigan’s index of consumer sentiment, and the Kansas City Fed’s financial stress index. Using a more recent dataset compared to that of Rapach and Zhou (2013), our results from predictive regressions show that the newly added variables do not play any sig-nificant statistical role in explaining the equity premium relative to the historical average benchmark over the out-of-sample horizon, even though they are believed to possess valuable informative content about the state of the economy and financial markets. Interestingly, however, barring the economic policy uncertainty index, the three other indexes considered in this study yields economically significant out-of-sample gains, especially during recessions, when compared to the historical benchmark.

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Bibliographic Info

Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201351.

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Length: 24 pages
Date of creation: Sep 2013
Date of revision:
Handle: RePEc:pre:wpaper:201351

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Keywords: Equity premium forecasting; asset pricing model; economic uncertainty; business cycle;

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  1. 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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