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Economic and Financial Crises and the Predictability of U.S. Stock Returns

By Daniel Hartmann, Bernd Kempa and Christian Pierdzioch

Abstract

We argue that the use of publicly available and easily accessible information on economic and financial crises to detect structural breaks in the link between stock returns and macroeconomic predictor variables improves the performance of simple trading rules in real time. In particular, our results suggest that accounting for structural breaks and regime shifts in forecasting regressions caused by economic and financial crises has the potential to increase the out-of-sample predictability of stock returns, the performance of simple trading rules, and the market-timing ability of an investor trading in the U.S. stock market.

Topics: C53 - Forecasting and Prediction Methods; Simulation Methods, G11 - Portfolio Choice; Investment Decisions, E44 - Financial Markets and the Macroeconomy
Year: 2006
DOI identifier: 10.1016/j.jempfin.2007.07.003
OAI identifier: oai:mpra.ub.uni-muenchen.de:561

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