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Does Debt Ceiling and Government Shutdown Help in Forecasting the US Equity Risk Premium?

Author

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  • Goodness C. Aye Author-Email: goodness.aye@gmail.com

    (Department of Economics, University of Pretoria, South Africa Author-Name: Frederick W. Deale Author-Email: dealed@lantic.net
    Department of Economics, University of Pretoria, South Africa)

  • Rangan Gupta

    () (Corresponding author Department of Economics, University of Pretoria, South Africa)

Abstract

This article evaluates the predictability of the equity risk premium in the United States by comparing the individual and complementary predictive power of macroeconomic variables and technical indicators using a compre- hensive set of 16 economic and 14 technical predictors over a monthly out-of- sample period of 1995:01 to 2012:12 and an in-sample period of 1986:01- 1994:12. In order to do so we consider, in addition to the set of variables used in Christopher J. Neely et al. (2013) and using a more recent dataset, the fore- casting ability of two other important variables namely government shutdown and debt ceiling. Our results show that one of the newly added variables name- ly government shutdown provides statistically significant out-of-sample predic- tive power over the equity risk premium relative to the historical average. Most of the variables, including government shutdown, also show significant eco- nomic gains for a risk averse investor especially during recessions.

Suggested Citation

  • Goodness C. Aye Author-Email: goodness.aye@gmail.com & Rangan Gupta, 2016. "Does Debt Ceiling and Government Shutdown Help in Forecasting the US Equity Risk Premium?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(3), pages 273-291, June.
  • Handle: RePEc:voj:journl:v:63:y:2016:i:3:p:273-291
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Rangan Gupta & Patrick Kanda & Mark E. Wohar, 2018. "Predicting Stock Market Movements in the United States: The Role of Presidential Approval Ratings," Working Papers 201830, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Equity risk premium forecasting; Debt ceiling; Government shut- down; Out-of-sample forecasts; Asset allocation;

    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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