On the Out-of-Sample Predictability of Stock Market Returns

By Hui Guo. 2002

196 citations recorded by the source corpus.

In this paper, I provide new evidence of the out-of-sample predictability of stock returns. In particular, I 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.

View Paper: https://www.semanticscholar.org/paper/e2a4a50ca3d7c99236f820e4257c559b374c50b6

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Citations in the corpus

• Approximately Normal Tests for Equal Predictive Accuracy in Nested Models (2007, unknown): “Recent examples include Lettau and Ludvigson (2001), Guo (2002), Goyal and Welch (2003), Ang et al. (2004), and Campbell and Thompson (2005).”
• Investor sentiment aligned: : A powerful predictor of stock returns (2015, methodology): “…1987; Fama and French, 1988), bookto-market ratio (Kothari and Shanken, 1997; Pontiff and Schall, 1998), stock volatility (French, Schwert, and Stambaugh, 1987; Guo, 2006), inflation (Fama and Schwert, 1977; Campbell and Vuolteenaho, 2004), corporate issuing activity (Baker and Wurgler, 2000).”
• A Comprehensive Look at the Empirical Performance ofEquity Premium Prediction II (2008, unknown): “12Another study by Guo (2006) finds that svar has OOS predictive power. However, Guo uses post WW-II sample period and downweights the fourth quarter of 1987 in calculating stock variance. We checked that this is why he can find significance where we find none. In the pre-WW2 period, there are many ”
• Out-of-Sample Equity Premium Prediction: Combination Forecasts and Links to the Real Economy (2010, unknown): “2007), consumption-wealth ratio (Lettau and Ludvigson 2001), and stock market volatility (Guo 2006).”
• Measuring and Modelling Variation in the Risk-Return Trade-off (2001, unknown): “Both Lettau and Ludvigson (2001a) and Guo (2006) find evidence of stock return predictability in out-of-sample tests, using cay and/or cay and stock market volatility as predictive variables.”
• Manager sentiment and stock returns (2019, methodology): “…1987; Fama and French, 1988), book-to-market ratio (Kothari and Shanken, 1997; Pontiff and Schall, 1998), stock volatility (French, Schwert, and Stambaugh, 1987; Guo, 2006), inflation (Fama and Schwert, 1977; Campbell and Vuolteenaho, 2004), and corporate issuing activity (Baker and Wurgler, 2000).”
• Forecasting the Equity Risk Premium: The Role of Technical Indicators (2014, unknown): “Harvey, Leybourne, and Newbold (1998) develop a statistic for testing the null hypothesis that a given forecast contains all of the relevant information found in a competing forecast (i.”
• The empirical risk–return relation: A factor analysis approach ☆ (2006, unknown): “This is consistent with the findings of Guo (2005), who reports that predictive regressions that include cayt along with a measure of aggregate stock market ARTICLE IN PRESS S.C. Ludvigson, S. Ng / Journal of Financial Economics 83 (2007) 171–222184 volatility as predictor variables exhibit strong…”