The Economic Value of Predicting Stock Index Returns and Volatility

ERIM Report Series Reference No. ERS-2001-75-F&A

50 Pages Posted: 27 Oct 2000

See all articles by Wessel Marquering

Wessel Marquering

Erasmus University Rotterdam (EUR) - Department of Financial Management

Marno Verbeek

Erasmus University - Rotterdam School of Management; Erasmus Research Institute of Management (ERIM); Netspar

Multiple version iconThere are 2 versions of this paper

Date Written: December 4, 2001

Abstract

In this paper, we analyze the economic value of predicting index returns as well as volatility. On the basis of fairly simple linear models, estimated recursively, we produce genuine out-of-sample forecasts for the return on the S&P 500 index and its volatility. Using monthly data from 1954 to 2001, we test the statistical significance of return and volatility predictability and examine the economic value of a number of alternative trading strategies. While we find strong evidence for market timing in both returns and volatility, the success of market timing and volatility timing varies considerably over the sample period. Further, it appears easier to forecast returns at times when volatility is high. For a mean-variance investor, this predictability is economically profitable, even if short sales are not allowed and transaction costs are quite large. The economic value of trading strategies that employ market timing in returns and volatility typically exceeds that of strategies that only employ timing in returns.

Keywords: Predictability of stock returns and volatility, market timing, performance evaluation

JEL Classification: G11, G14

Suggested Citation

Marquering, Wessel A. and Verbeek, Marno, The Economic Value of Predicting Stock Index Returns and Volatility (December 4, 2001). ERIM Report Series Reference No. ERS-2001-75-F&A, Available at SSRN: https://ssrn.com/abstract=241213 or http://dx.doi.org/10.2139/ssrn.241213

Wessel A. Marquering (Contact Author)

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
F4-26
Rotterdam 3000 DR
Netherlands
+31 10 408 2786 (Phone)
+31 10 408 9017 (Fax)

Marno Verbeek

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands
+31 10 408 2790 (Phone)

HOME PAGE: http://www.rsm.nl/mverbeek

Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,074
Abstract Views
4,043
rank
24,918
PlumX Metrics