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Equity premium prediction: Are economic and technical indicators instable?

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  • Baetje, Fabian
  • Menkhoff, Lukas

Abstract

We show that technical indicators deliver economic value in predicting the U.S. equity premium. A crucial element of this value stems from the stability of return predictability over the full sample period from 1950 to 2013. Results tentatively improve over time and beat alternatives over sub-periods. By contrast, economic indicators work well only until the 1970s, thereafter they lose predictive power, even when the last crisis is considered. Translating the predictive power of technical indicators into a standard investment strategy delivers an average Sharpe Ratio of 0.6 p.a. for investors who had entered the market at any point in time.

Suggested Citation

  • Baetje, Fabian & Menkhoff, Lukas, 2015. "Equity premium prediction: Are economic and technical indicators instable?," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 113079, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:113079
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    Cited by:

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    4. Adamantios Ntakaris & Juho Kanniainen & Moncef Gabbouj & Alexandros Iosifidis, 2019. "Mid-price Prediction Based on Machine Learning Methods with Technical and Quantitative Indicators," Papers 1907.09452, arXiv.org.
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    10. Martin Širůček & Karel Šíma, 2016. "Optimized Indicators of Technical Analysis on the New York Stock Exchange," Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, Mendel University Press, vol. 64(6), pages 2123-2131.
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    18. Anwen Yin, 2019. "Equity Premium Prediction with Structural Breaks: A Two-Stage Forecast Combination Approach," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 11(12), pages 1-50, December.
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    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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