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In-sample and out-of-sample properties of international stock return dynamics conditional on equilibrium pricing factors


  • Helmut Herwartz
  • Leonardo Morales-Arias


We conduct a comprehensive analysis of the in-sample and out-of-sample properties of stock return dynamics in 14 developed and 12 emerging markets. We start by formulating a theoretically founded asset-pricing model that decomposes log stock returns into equilibrium pricing factors (accounting and discount factors) and short-run (vector) autoregressive dynamics. Based on this model, we design both in-sample and out-of-sample panel modeling techniques to investigate international stock market returns at short and long horizons. Our findings show that (i) there is evidence of in-sample signaling from the equilibrium relations but this feature does not appear to translate into out-of-sample forecasting, (ii) a rolling window forecasting scheme can better approximate the distributional features of returns in comparison with a recursive method, (iii) forecasting with single-lagged equilibrium relationships does not play a uniformly significant role in anticipating returns, (iv) forecasting with a full model containing all lagged equilibrium relations can outperform both a random walk model and a VAR(1) model and (v) linear combinations of alternative forecasts reduce ex-ante uncertainty.

Suggested Citation

  • Helmut Herwartz & Leonardo Morales-Arias, 2009. "In-sample and out-of-sample properties of international stock return dynamics conditional on equilibrium pricing factors," The European Journal of Finance, Taylor & Francis Journals, vol. 15(1), pages 1-28.
  • Handle: RePEc:taf:eurjfi:v:15:y:2009:i:1:p:1-28
    DOI: 10.1080/13518470802423338

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    Cited by:

    1. Helmut Herwartz & Konstantin A. Kholodilin, 2014. "In‐Sample and Out‐of‐Sample Prediction of stock Market Bubbles: Cross‐Sectional Evidence," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 33(1), pages 15-31, January.
    2. Rengel, Malte & Herwartz, Helmut & Xu, Fang, 2013. "Persistence in the price-to-dividend ratio and its macroeconomic fundamentals," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79860, Verein für Socialpolitik / German Economic Association.


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