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Equity Premium Prediction: Are Economic and Technical Indicators Unstable?

Discussion Papers 1552, 47 S.

Fabian Baetje, Lukas Menkhoff

2016

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Published in: International Journal of Forecasting 32 (2016), 4, S. 1193-1207

Abstract

We show that technical indicators deliver stable economic value in predicting the U.S. equity premium over the out-of-sample period from 1966 to 2014. Results tentatively improve over time and beat alternatives over a large continuum of sub-periods. By contrast, economic indicators work well only until the 1970s, but thereafter they lose predictive power, even when the last crisis is considered. Translating the predictive power of technical indicators into a standard investment strategy delivers an annualized average Sharpe ratio of 0.55 p.a. (after transaction costs) for investors who had entered the market at any point in time.

Lukas Menkhoff

Senior Research Associate in the Macroeconomics Department



JEL-Classification: G17;G12
Keywords: Equity premium predictability, economic indicators, technical indicators, break tests
Frei zugängliche Version: (econstor)
http://hdl.handle.net/10419/129207

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