Abstract
This article examines the performance of several variables that could be good predictors of the equity risk premium in the European Monetary Union for a period that spans from 2000 to 2015. In-sample, technical indicators display predictive power, matching or exceeding that of traditional economic forecasting variables. We also find consistent results in the fact that combining information from technical and economic variables improves equity risk premium forecasts, compared to using these variables alone. Nevertheless, out-of-sample exercises do not confirm in-sample results. Economic predictors show stronger out-of-sample forecasting ability than technical indicators, and apart from volume rules, technical indicators do not show forecasting power. Overall, only a few economic and technical predictors display forecasting power in-sample and out-of-sample, and provide economic value for a risk-averse investor.
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Notes
- 1.
Economic Variables include: Dividend-Price ratio, Dividend-Yield ratio, Earnings-Price ratio, Payout ratio, Book-to-Market ratio, Euribor 3M rate, 10Y Euro Swap rate, Term Spread, Default Yield Spread, Default Return Spread, Inflation rate and Equity Risk Premium Volatility. Technical Indicators include: Moving Averages rules, Momentum rules and Volume rules.
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Cortés-Sánchez, D., Soriano-Felipe, P. (2018). Forecasting the Equity Risk Premium in the European Monetary Union. In: Corazza, M., Durbán, M., Grané, A., Perna, C., Sibillo, M. (eds) Mathematical and Statistical Methods for Actuarial Sciences and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-89824-7_46
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DOI: https://doi.org/10.1007/978-3-319-89824-7_46
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