Research Note: The Economic Benefit of Forecasting Market Components for Mean-Variance Investors
5 Pages Posted: 20 Jan 2017
Date Written: October 12, 2016
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: Suggested Citation