The Keys of Predictability: A Comprehensive Study
69 Pages Posted: 21 Mar 2019 Last revised: 4 Apr 2019
Date Written: March 20, 2019
The problem of market predictability can be decomposed into two parts: predictive models and predictors. At first, we show how the joint employment of model selection and machine learning models can dramatically increase our capability to forecast the equity premium out-of-sample. Secondly, we introduce batteries of powerful predictors which brings the monthly S&P500 R-square to a high level of 24%. Finally, we prove how predictability is a generalized characteristic of U.S. equity markets. For each of the three parts, we consider potential and challenges posed by the new approaches in the asset pricing field.
Keywords: Markets Predictability, Machine Learning, Model Selection
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