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Forecasting the future state of the economy in the United States: The role of tradable “new” risk factors
Author(s) -
Shi Qi,
Li Bin
Publication year - 2021
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12300
Subject(s) - economics , argument (complex analysis) , predictive power , capital asset pricing model , asset (computer security) , criticism , horizon , state (computer science) , econometrics , financial economics , computer science , political science , philosophy , biochemistry , chemistry , physics , computer security , epistemology , algorithm , astronomy , law
We investigate the predictive power of several innovative tradable risk factors that have proved to be competent factors in recent asset pricing studies. Our evidence indicates that all these risk factors can predict the future state of the economy to some significant extent, and they appear to perform better in short‐horizon than in long‐horizon forecasting. Using a bootstrap simulation, our estimations of bootstrapped critical values robustly reject the criticism that our significance of statistics is overstated or understated. Such results lend support to Cochrane's argument: that a competent pricing risk factor in a plausible pricing kernel may predict the future state of economy.