Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium?
AbstractThis 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201351.
Length: 24 pages
Date of creation: Sep 2013
Date of revision:
Equity premium forecasting; asset pricing model; economic uncertainty; business cycle;
Other versions of this item:
- Rangan Gupta & Shawkat Hammoudeh & Mampho P. Modise & Duc Khuong Nguyen, 2013. "Can Economic Uncertainty, Financial Stress and Consumer Sentiments Predict U.S. Equity Premium?," Working Papers 2013-020, Department of Research, Ipag Business School.
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-13 (All new papers)
- NEP-FOR-2013-09-13 (Forecasting)
- NEP-ORE-2013-09-13 (Operations Research)
You can help add them by filling out this form.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rangan Gupta).
If references are entirely missing, you can add them using this form.