Equity Premium Prediction: Are Economic and Technical Indicators Unstable?

50 Pages Posted: 24 Feb 2016

See all articles by Fabian Baetje

Fabian Baetje

Leibniz Universität Hannover

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Date Written: February 2016

Abstract

We show that technical indicators deliver stable economic value in predicting the U.S. equity premium over the out-of-sample period from 1966 to 2014. Results tentatively improve over time and beat alternatives over a large continuum of sub-periods. By contrast, economic indicators work well only until the 1970s, but thereafter they lose predictive power, even when the last crisis is considered. Translating the predictive power of technical indicators into a standard investment strategy delivers an annualized average Sharpe ratio of 0.55 p.a. (after transaction costs) for investors who had entered the market at any point in time.

Keywords: equity premium predictability, economic indicators, technical indicators, break tests

JEL Classification: G17, G12

Suggested Citation

Baetje, Fabian and Menkhoff, Lukas, Equity Premium Prediction: Are Economic and Technical Indicators Unstable? (February 2016). DIW Berlin Discussion Paper No. 1552. Available at SSRN: https://ssrn.com/abstract=2737275 or http://dx.doi.org/10.2139/ssrn.2737275

Fabian Baetje

Leibniz Universität Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

Lukas Menkhoff (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

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