Out-of-Sample Stock Return Predictability in Australia

Posted: 19 Dec 2012

See all articles by Yiwen (Paul) Dou

Yiwen (Paul) Dou

Macquarie University

David R. Gallagher

Rozetta Institute

David Schneider

UniSuper Management Limited

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Date Written: December 12, 2012

Abstract

We provide one of the first comprehensive studies on out-of-sample stock returns predictability in Australia. While most of the empirically well-known predictive variables fail to generate out-of-sample predictability, we document a significant out-of-sample prediction in forecasting ahead one-year and, to a lesser extent, one-quarter future excess returns, using a combination forecast of variables. We also find improved asset allocation using the combination forecast of these predictors. The combining methods are useful in predicting sector premia. Specifically, a sector rotation strategy relying on the combining methods outperforms the market by 3.27% per annum on a risk-adjusted basis.

Keywords: combination forecasts, out-of-sample predictability, portfolio allocation, predictive regression, sector rotation

Suggested Citation

Dou, Yiwen (Paul) and Gallagher, David R. and Schneider, David and Walter, Terry Stirling, Out-of-Sample Stock Return Predictability in Australia (December 12, 2012). Australian Journal of Management, Vol. 37, No. 3, 2012, Available at SSRN: https://ssrn.com/abstract=2190825

Yiwen (Paul) Dou (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

David R. Gallagher

Rozetta Institute ( email )

Sydney

David Schneider

UniSuper Management Limited ( email )

Level 35, 385 Bourke Street
Melbourne, 3000
Australia

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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