Time-frequency Forecast of the Equity Premium

42 Pages Posted: 30 Apr 2020

See all articles by Gonçalo Faria

Gonçalo Faria

Catholic University of Portugal (UCP) - School of Economics and Management and CEGE

Fabio Verona

Bank of Finland - Research

Date Written: April 30, 2020

Abstract

Any time series can be decomposed into cyclical components fluctuating at different frequencies. Accordingly, in this paper we propose a method to forecast the stock market's equity premium which exploits the frequency relationship between the equity premium and several predictor variables. We evaluate a large set of models and find that, by selecting the relevant frequencies for equity premium forecasting, this method significantly improves in both statistical and economic sense upon standard time series forecasting methods. This improvement is robust regardless of the predictor used, the out-of-sample period considered, and the frequency of the data used.

Keywords: time-frequency forecast, equity premium, multiresolution analysis

JEL Classification: C58, G11, G17

Suggested Citation

Faria, Gonçalo and Verona, Fabio, Time-frequency Forecast of the Equity Premium (April 30, 2020). Bank of Finland Research Discussion Paper No. 6/2020, Available at SSRN: https://ssrn.com/abstract=3589662

Gonçalo Faria (Contact Author)

Catholic University of Portugal (UCP) - School of Economics and Management and CEGE ( email )

Universidade Católica Portuguesa
Rua Diogo Botelho 1327
Porto, 4169-005
Portugal

Fabio Verona

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

HOME PAGE: http://bofcris.solenovo.fi/crisyp/disp/_/en/cr_redir_all/fet/fet/sea?direction=3&id=3827426

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