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On the out-of-sample predictability of stock market returns

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  • Hui Guo

Abstract

In this paper, we provide new evidence of the out-of-sample predictability of stock returns. In particular, we 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, 2003. "On the out-of-sample predictability of stock market returns," Working Papers 2002-008, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2002-008
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    References listed on IDEAS

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    9. 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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    Keywords

    Stock market;

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