Research Note: The Economic Benefit of Forecasting Market Components for Mean-Variance Investors

5 Pages Posted: 20 Jan 2017  

Lars Kaiser

University of Liechtenstein

Sebastian Stöckl

University of Liechtenstein

Date Written: October 12, 2016

Abstract

Existing studies focus on variables’ predictive quality with respect to the aggregated stock market, which per definition contains a minimum level of idiosyncratic risk and provides a favorable environment for such applications. Economic intuition suggests that the level of out-of-sample predictability decreases as we climb down the ladder from market aggregates to industries and ultimately single stock returns. Thereon, we ask the central question:

Do forecasting errors from direct predictions of market components out-way the additional errors introduced by an intermediary asset pricing model?

This is an early stage research note and we welcome any feedback and comments.

Keywords: out-of-sample return predictability, industry portfolios, CAPM, empirical mean, market implied returns

JEL Classification: G17

Suggested Citation

Kaiser, Lars and Stöckl, Sebastian, Research Note: The Economic Benefit of Forecasting Market Components for Mean-Variance Investors (October 12, 2016). Available at SSRN: https://ssrn.com/abstract=2901935 or http://dx.doi.org/10.2139/ssrn.2901935

Lars Kaiser (Contact Author)

University of Liechtenstein ( email )

Fürst Franz Josef Strasse
Vaduz, 9490
Liechtenstein
+423 265 1186 (Phone)

HOME PAGE: http://www.uni.li/lars.kaiser

Sebastian Stöckl

University of Liechtenstein ( email )

Fürst-Franz-Josef-Strasse
Vaduz, FL-9490
Liechtenstein

HOME PAGE: http://www.uni.li/sebastian.stoeckl

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