Asset Returns Under Model Uncertainty: Evidence From the Euro Area, the US and the UK

84 Pages Posted: 25 Aug 2013

See all articles by João Sousa

João Sousa

Banco de Portugal

Ricardo M. Sousa

University of Minho; Economic Policies Research Unit (NIPE); London School of Economics & Political Science (LSE) - Financial Markets Group; London School of Economics

Date Written: August 5, 2013

Abstract

The goal of this paper is to analyze predictability of future asset returns in the context of model uncertainty. Using data for the euro area, the US and the UK, we show that one can improve the forecasts of stock returns using a model averaging approach, and there is a large amount of model uncertainty. The empirical evidence for the euro area suggests that several macroeconomic, …financial and macro-financial variables are consistently among the most prominent determinants of the risk premium. As for the US, only a few predictors play an important role. In the case of the UK, future stock returns are better forecast by …financial variables.

Keywords: Stock returns, model uncertainty, Bayesian Model Averaging

JEL Classification: E21, G11, E44

Suggested Citation

Sousa, João and Sousa, Ricardo Magalhaes, Asset Returns Under Model Uncertainty: Evidence From the Euro Area, the US and the UK (August 5, 2013). ECB Working Paper No. 1575, Available at SSRN: https://ssrn.com/abstract=2305938

João Sousa (Contact Author)

Banco de Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

Ricardo Magalhaes Sousa

University of Minho ( email )

Campus Gualtar
Braga, 4710-057
Portugal
+351253604584 (Phone)
+351253676375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa

Economic Policies Research Unit (NIPE) ( email )

Campus de Gualtar
Braga, 4710-057
Portugal
+351253604584 (Phone)
+351253676375 (Fax)

HOME PAGE: http://www.eeg.uminho.pt/economia/rjsousa

London School of Economics & Political Science (LSE) - Financial Markets Group ( email )

Houghton Street
London WC2A 2AE
United Kingdom

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

HOME PAGE: http://econ.lse.ac.uk

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