Forecasting Stock Returns with Large Dimensional Factor Models

Giovannelli, Alessandro and Massacci, Daniele and Soccorsi, Stefano (2020) Forecasting Stock Returns with Large Dimensional Factor Models. Working Paper. Lancaster University, Department of Economics, Lancaster.

[img]
Text (LancasterWP2020_019)
LancasterWP2020_019.pdf - Published Version

Download (4MB)

Abstract

We study equity premium out-of-sample predictability by extracting the information contained in a high number of macroeconomic predictors via large dimensional factor models. We compare the well known factor model with a static representation of the common components with a more general model known as the Generalized Dynamic Factor Model. Using statistical and economic evaluation criteria, we empirically show that the Generalized Dynamic Factor Model helps predicting the equity premium. Exploiting the link between business cycle and return predictability, we find more accurate predictions by combining rolling and recursive forecasts in real-time, with promising results in the aftermath of the Great Financial Crisis.

Item Type:
Monograph (Working Paper)
Subjects:
ID Code:
147459
Deposited By:
Deposited On:
13 Oct 2020 14:45
Refereed?:
No
Published?:
Published
Last Modified:
25 Oct 2020 00:22