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On the Out-of-Sample Predictability of Stock Market Returns


  • Hui Guo

    (Federal Reserve Bank of St. Louis)


In this paper, I provide new evidence of the out-of-sample predictability of stock returns. In particular, I find that the consumption-wealth ratio in conjunction with a measure of aggregate stock market volatility exhibits substantial out-of-sample forecasting power for excess stock market returns. Also, simple trading strategies based on the documented predictability generate returns of higher mean and lower volatility than the buy-and-hold strategy does, and this difference is economically important.

Suggested Citation

  • Hui Guo, 2006. "On the Out-of-Sample Predictability of Stock Market Returns," The Journal of Business, University of Chicago Press, vol. 79(2), pages 645-670, March.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:2:p:645-670

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    References listed on IDEAS

    1. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
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    13. Jeff Fleming, 2001. "The Economic Value of Volatility Timing," Journal of Finance, American Finance Association, vol. 56(1), pages 329-352, February.
    14. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-428.
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