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Economically significant stock market forecasts
Author(s) -
Peláez Rolando F.
Publication year - 1998
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1998.tb01607.x
Subject(s) - treynor ratio , sharpe ratio , economics , econometrics , stock (firearms) , ex ante , financial economics , stock market , stock market index , excess return , investment strategy , portfolio , monetary economics , geography , context (archaeology) , archaeology , macroeconomics , market liquidity
It has been known for some time that a small, but statistically significant portion of the monthly variation in excess returns on the S&P 500‐stock index is predictable using ex ante information. This paper presents a model whose out‐of‐sample forecasts have economic significance. Specifically, a switching rule conditioned on out‐of‐sample forecasts of stock excess returns, produces investment outcomes that mean‐variance dominate the buy‐and‐hold. The switching strategy yields superior risk‐adjusted returns as judged by the composite performance measures of Treynor, Sharpe, and Jensen.