Download This PaperForecasting the Long-Term Equity Premium for Asset Allocation
Sakkas, Athanasios and Tessaromatis, Nikolaos, Forecasting the Long-Term Equity Premium for Asset Allocation (17 June 2022). Financial Analysts Journal, 2022, 78(3): 9-29. DOI: 10.1080/0015198X.2022.2073782
53 Pages Posted: 14 Jul 2021 Last revised: 2 Aug 2022
Date Written: June 17, 2022
Abstract
Long-term country equity premium forecasts based on a cross-sectional global factor model (CS-GFM), where factors represent compensation for risks proxied by valuation and financial variables, are superior, statistically and economically, than forecasts based on time-series prediction models commonly used in academia and practice. CS-GFM equity premium forecasts produce significant utility gains compared to long-term asset allocation strategies based on eighteen commonly used prediction models, consistently across the US and eleven developed equity markets.
Keywords: Forecasting, Long-horizon predictability, Asset allocation, Global factor model
JEL Classification: G11, G15, G17
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