Forecasting the Equity Premium: Mind the News!

41 Pages Posted: 26 Apr 2019 Last revised: 16 May 2019

See all articles by Philipp Adämmer

Philipp Adämmer

Helmut Schmidt University Hamburg - Department of Mathematics and Statistics

Rainer Alexander Schüssler

University of Rostock - Department of Economics

Date Written: April 18, 2019

Abstract

This paper introduces a novel strategy for predicting monthly equity premia based on extracted news from more than 700,000 newspaper articles, published in The New York Times and Washington Post between 1980 and 2018. We propose a flexible data-adaptive switching approach for mapping a large set of different news-topics into forecasts of aggregate stock returns. The information embedded in our extracted news is not captured by established predictors. Compared to the prevailing historical mean between 1999 and 2018, we find large out-of-sample (OOS) gains with an R²OOS of 6.52% and sizeable utility gains for a mean-variance investor. The empirical results indicate that geopolitical news are more valuable than economic news and that gains arise in down markets.

Keywords: Topic Modeling, Big Data, Return Predictability, Text as Data

JEL Classification: G11, G12, G17, C53

Suggested Citation

Adämmer, Philipp and Schüssler, Rainer Alexander, Forecasting the Equity Premium: Mind the News! (April 18, 2019). Available at SSRN: https://ssrn.com/abstract=3370424 or http://dx.doi.org/10.2139/ssrn.3370424

Philipp Adämmer

Helmut Schmidt University Hamburg - Department of Mathematics and Statistics ( email )

Hostenhofweg 85
Hamburg, 22043
Germany

Rainer Alexander Schüssler (Contact Author)

University of Rostock - Department of Economics ( email )

Ulmenstr. 69
Rostock, 18057
Germany

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