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Return
Do return prediction models add economic value?
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DOI：10.1016/j.jbankfin.2012.06.008.png)
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Abstract
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We compare statistical and economic measures of forecasting performance across a large set of stock return prediction models with time-varying mean and volatility. We find that it is very common for models to produce higher out-of-sample mean squared forecast errors than a model assuming a constant equity premium, yet simultaneously add economic value when their forecasts are used to guide portfolio decisions. While there is generally a positive correlation between a return prediction model's out-of-sample statistical performance and its ability to add economic value, the relation tends to be weak and only explains a small part of the cross-sectional variation in different models' economic value. (C) 2012 Elsevier B.V. All rights reserved.
Keywords:
Predictability of stock returns
Mean squared forecast error
Economic and statistical measures of forecasting performance
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