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Equity Premium Prediction: Taking into Account the Role of Long, even Asymmetric, Swings in Stock Market Behavior

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  • Kuok Sin Un
  • Marcel Ausloos

Abstract

Through a novel approach, this paper shows that substantial change in stock market behavior has a statistically and economically significant impact on equity risk premium predictability both on in-sample and out-of-sample cases. In line with Auer's ''Bullish ratio'', a ''Bullish index'' is introduced to measure the changes in stock market behavior, which we describe through a ''fluctuation detrending moving average analysis'' (FDMAA) for returns. We consider 28 indicators. We find that a ''positive shock'' of the Bullish Index is closely related to strong equity risk premium predictability for forecasts based on macroeconomic variables for up to six months. In contrast, a ''negative shock'' is associated with strong equity risk premium predictability with adequate forecasts for up to nine months when based on technical indicators.

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  • Kuok Sin Un & Marcel Ausloos, 2025. "Equity Premium Prediction: Taking into Account the Role of Long, even Asymmetric, Swings in Stock Market Behavior," Papers 2509.10483, arXiv.org.
    • Handle: RePEc:arx:papers:2509.10483
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