UCL School of Slavonic and East European Studies (SSEES)
Abstract
We examine whether real-time return forecasts are valuable to an investor looking to allocate
their portfolio across a wide selection of countries. We expand the Sum-of-Parts (SoP)
method for forecasting stock returns to an international setup by adding FX returns as an
additional component. We use two different methods to calculate the forecasts. The first
method (Empirical Mode Decomposition) uses wavelets to frequency decompose each part
into locally independent sub-signals, while the second method combines historical averages
and predictive regressions. We then compare the performance of various types of portfolia
under the SoP and historical average forecasts, with rebalancing taking place every period.
We find that SoP forecasts deliver economic gains over the historical average, especially
when the EMD method is implemented. We further demonstrate that economic gains can
be generated for investors based in various different countries