Regime shifts and stock return predictability

Hammerschmid, Regina and Lohre, Harald (2018) Regime shifts and stock return predictability. International Review of Economics and Finance, 56. pp. 138-160. ISSN 1059-0560

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Abstract

Identifying economic regimes is useful in a world of time-varying risk premia. We apply regime switching models to common factors proxying for the macroeconomic regime and show that the ensuing regime factor is relevant in forecasting the equity risk premium. Moreover, the relevance of this regime factor is preserved in the presence of fundamental variables and technical indicators which are known to predict equity risk premia. Based on multiple predictive regressions and pooled forecasts, the macroeconomic regime factor is deemed complementary relative to the fundamental and technical information sets. Finally, these forecasts exhibit significant out-of-sample predictability that ultimately translates into considerable utility gains in a mean-variance portfolio strategy.

Item Type:
Journal Article
Journal or Publication Title:
International Review of Economics and Finance
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/2000/2002
Subjects:
ID Code:
160323
Deposited By:
Deposited On:
08 Oct 2021 15:25
Refereed?:
Yes
Published?:
Published
Last Modified:
14 Oct 2021 05:44