Forecasting the Equity Premium: Mind the News!

Review of Finance, Forthcoming

59 Pages Posted: 26 Apr 2019 Last revised: 25 Feb 2020

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; Technical University of Dortmund

Date Written: November 26, 2019

Abstract

We introduce a novel strategy to predict monthly equity premia that is based on extracted news from more than 700,000 newspaper articles, which were published in The New York Times and Washington Post between 1980 and 2018. We propose a flexible data-adaptive switching approach to map a large set of different news-topics into forecasts of aggregate stock returns. The information that is embedded in our extracted news is not captured by established economic 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 at times more valuable than economic news to predict the equity premium and we also find that
forecasting 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! (November 26, 2019). Review of Finance, Forthcoming, 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

Technical University of Dortmund ( email )

Emil-Figge-Straße 50
Dortmund, 44227
Germany

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