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Asymptotic Inference for Performance Fees and the Predictability of Asset Returns

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  • Michael W. McCracken
  • Giorgio Valente

Abstract

In this article, we provide analytical, simulation, and empirical evidence on a test of equal economic value from competing predictive models of asset returns. We define economic value using the concept of a performance fee—the amount an investor would be willing to pay to have access to an alternative predictive model used to make investment decisions. We establish that this fee can be asymptotically normal under modest assumptions. Monte Carlo evidence shows that our test can be accurately sized in reasonably large samples. We apply the proposed test to predictions of the U.S. equity premium.

Suggested Citation

  • Michael W. McCracken & Giorgio Valente, 2018. "Asymptotic Inference for Performance Fees and the Predictability of Asset Returns," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 36(3), pages 426-437, July.
    • Handle: RePEc:taf:jnlbes:v:36:y:2018:i:3:p:426-437
    DOI: 10.1080/07350015.2016.1215317
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    Cited by:

    1. Li, Jiahan & Tsiakas, Ilias, 2017. "Equity premium prediction: The role of economic and statistical constraints," Journal of Financial Markets, Elsevier, vol. 36(C), pages 56-75.
    2. Lyócsa, Štefan & Todorova, Neda, 2020. "Trading and non-trading period realized market volatility: Does it matter for forecasting the volatility of US stocks?," International Journal of Forecasting, Elsevier, vol. 36(2), pages 628-645.
    3. Daniel de Almeida & Ana-Maria Fuertes & Luiz Koodi Hotta, 2025. "Out-of-Sample Predictability of the Equity Risk Premium," Mathematics, MDPI, vol. 13(2), pages 1-23, January.
    4. Stein, Tobias, 2024. "Forecasting the equity premium with frequency-decomposed technical indicators," International Journal of Forecasting, Elsevier, vol. 40(1), pages 6-28.
    5. Potì, Valerio & Levich, Richard & Conlon, Thomas, 2020. "Predictability and pricing efficiency in forward and spot, developed and emerging currency markets," Journal of International Money and Finance, Elsevier, vol. 107(C).
    6. Adrian Fernandez-Perez & Ana-Maria Fuertes & Joëlle Miffre, 2026. "Does Speculation in Futures Markets Improve Commodity Hedging Decisions?," Management Science, INFORMS, vol. 72(3), pages 2525-2544, March.
    7. Erik Kole & Dick Dijk, 2017. "How to Identify and Forecast Bull and Bear Markets?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(1), pages 120-139, January.
    8. Xi Dong & Yan Li & David E. Rapach & Guofu Zhou, 2022. "Anomalies and the Expected Market Return," Journal of Finance, American Finance Association, vol. 77(1), pages 639-681, February.
    9. Rapach, David & Zhou, Guofu, 2013. "Forecasting Stock Returns," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 328-383, Elsevier.

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