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Out-of-Sample Equity Premium Predictability in South Africa: Evidence from a Large Number of Predictors

Author

Listed:
  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    () (Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa)

  • Josine Uwilingiye

    () (Department of Economics and Econometrics, University of Johannesburg)

Abstract

This paper uses a predictive regression framework to examine the out-of-sample predictability of South Africa’s equity premium, using a host of financial and macroeconomic variables. Past studies tend to suggest that the predictors on their own fail to deliver consistent out-of-sample forecast gains relative to the historical average (random walk model). We therefore employ various methods of forecast combination, bootstrap aggregation (bagging), principal component and Bayesian regressions to allow for a simultaneous role of the variables under consideration. Our results show that forecast combination methods and principal component regressions improve the predictability of the equity premium relative to the benchmark random walk model. However, the Bayesian predictive regressions are found to be the standout performers with the models outperforming the individual regressions, forecast combination methods, bagging and principal component regressions.

Suggested Citation

  • Rangan Gupta & Mampho P. Modise & Josine Uwilingiye, 2011. "Out-of-Sample Equity Premium Predictability in South Africa: Evidence from a Large Number of Predictors," Working Papers 201122, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201122
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

    1. Goodness C. Aye & Rangan Gupta & Mampho P. Modise, 2012. "Structural Breaks and Predictive Regressions Models of South African Equity Premium," Working Papers 201209, University of Pretoria, Department of Economics.
    2. Gupta, Rangan & Hammoudeh, Shawkat & Modise, Mampho P. & Nguyen, Duc Khuong, 2014. "Can economic uncertainty, financial stress and consumer sentiments predict U.S. equity premium?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 367-378.
    3. Ruipeng Liu & Riza Demirer & Rangan Gupta & Mark E. Wohar, 2017. "Do Bivariate Multifractal Models Improve Volatility Forecasting in Financial Time Series? An Application to Foreign Exchange and Stock Markets," Working Papers 201728, University of Pretoria, Department of Economics.
    4. repec:ipg:wpaper:2013-020 is not listed on IDEAS
    5. repec:ipg:wpaper:20 is not listed on IDEAS
    6. Nicholas Apergis & Rangan Gupta, 2016. "Can Weather Conditions in New York Predict South African Stock Returns?," Working Papers 201634, University of Pretoria, Department of Economics.

    More about this item

    Keywords

    Equity Premium; Predictive Regressions; Forecast Combinations; Bagging; Principal Component Regressions; Bayesian Predictive Regressions;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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