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Equity premium prediction: Taking into account the role of long, even asymmetric, swings in stock market behavior

journal contribution
posted on 2023-09-20, 09:35 authored by Kuok Sin Un, M Ausloos
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 “B 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.

History

Author affiliation

School of Business, University of Leicester

Published in

Physica A: Statistical Mechanics and its Applications

Volume

608

Pagination

128285 - 128285

Publisher

Elsevier BV

issn

0378-4371

Copyright date

2022

Language

en

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