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Forecasting the Market Equity Premium: Does Nonlinearity Matter?

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  • Anwen Yin

Abstract

We propose using the nonlinear method of smoothing splines in conjunction with forecast combination to predict the market equity premium. The smooth splines are flexible enough to capture the possible nonlinear relationship between the equity premium and predictive variables while controlling for complexity, overcoming the difficulties often attached to nonlinear methods such as computational cost, overfitting and interpretation. Our empirical results show that when used with forecast combination, the smoothing spline forecasts outperform many competing methods such as the adaptive combinations, shrinkage estimators and technical indicators, in delivering statistical and economic gains consistently.

Suggested Citation

  • Anwen Yin, 2021. "Forecasting the Market Equity Premium: Does Nonlinearity Matter?," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(5), pages 1-9, May.
    • Handle: RePEc:ibn:ijefaa:v:13:y:2021:i:5:p:9
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    References listed on IDEAS

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    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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