Forecasting the equity risk premium with frequency-decomposed predictors

Faria, Gonçalo; Verona, Fabio

Publication

Forecasting the equity risk premium with frequency-decomposed predictors

2016Working paper

dc.contributor.author	Faria, Gonçalo
dc.contributor.author	Verona, Fabio
dc.date.accessioned	2018-07-05T16:18:27Z
dc.date.available	2018-07-05T16:18:27Z
dc.date.issued	2016
dc.description.abstract	We show that the out-of-sample forecast of the equity risk premium can b e signi cantly improved by taking into account the frequency-domain relationship b etween the equity risk premium and several p otential predictors. We consider fteen predictors from the existing literature, for the out-of-sample forecasting p erio d from January 1990 to Decemb er 2014. The b est result achieved for individual predictors is a monthly out-of-sample R 2 of 2.98 % and utility gains of 549 basis p oints p er year for a mean-variance investor. This p erformance is improved even further when the individual forecasts from the frequency- decomp osed predictors are combined. These results are robust for di erent subsamples, including the Great Mo deration p erio d, the Great Financial Crisis p erio d and, more generically, p erio ds of bad, normal and go o d economic growth. The strong and robust p erformance of this metho d comes from its ability to disentangle the information aggregated in the original time series of each variable, which allows to isolate the frequencies of the predictors with the highest predictive p ower from the noisy parts.	pt_PT
dc.description.version	info:eu-repo/semantics/publishedVersion	pt_PT
dc.identifier.citation	Faria, G., Verona, F. (2016). Forecasting the equity risk premium with frequency-decomposed predictors. Working papers: Economics. N.º 6, 40 p.	pt_PT
dc.identifier.uri	http://hdl.handle.net/10400.14/25178
dc.language.iso	eng	pt_PT
dc.peerreviewed	no	pt_PT
dc.rights.uri	http://creativecommons.org/licenses/by/4.0/	pt_PT
dc.subject	Predictability	pt_PT
dc.subject	Equity risk premium	pt_PT
dc.subject	Frequency domain	pt_PT
dc.subject	Discrete wavelets	pt_PT
dc.title	Forecasting the equity risk premium with frequency-decomposed predictors	pt_PT
dc.type	working paper
dspace.entity.type	Publication
oaire.citation.title	Working papers: Economics	pt_PT
rcaap.rights	openAccess	pt_PT
rcaap.type	workingPaper	pt_PT