Published in:Discussion Papers on Business and Economics, University of Southern Denmark, 11/2020
Extent:
1 Online-Ressource (21 p)
Language:
English
DOI:
10.2139/ssrn.3726076
Identifier:
Origination:
Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 6, 2020 erstellt
Description:
I derive two valid forecasting models of the equity premium in monthly frequency, based on little more than no-arbitrage: A “predictability timing” version of partial least squares, given that predictability is theoretically time varying; and a least squares model with realized market premiums in monthly frequency as the regressor, since realized returns are theoretically correlated to risk and to the price of risk. This evidence is consistent with the instability inherent to monthly equity premium forecasts based on standard partial least squares and disaggregated book-to-markets as regressors, and with the fact that taking one extra lag of book-to-markets in predictive return regressions improves the estimates