@article{f996e3417fbb4b9e97ef862134b734bf,
title = "Forecasting stock market returns by summing the frequency-decomposed parts",
abstract = "We generalize the Ferreira and Santa-Clara (2011) sum-of-the-parts method for forecasting stock market returns. Rather than summing the parts of stock returns, we suggest summing some of the frequency-decomposed parts. The proposed method significantly improves upon the original sum-of-the-parts and delivers statistically and economically gains over historical mean forecasts, with monthly out-of-sample R2 of 2.60% and annual utility gains of 558 basis points. The strong performance of this method comes from its ability to isolate the frequencies of the parts with the highest predictive power, and from the fact that the selected frequency-decomposed parts carry complementary information that captures different frequencies of stock market returns.",
keywords = "Asset allocation, Equity premium, Frequency domain, Predictability, Stock returns, Wavelets",
author = "Gon{\c c}alo Faria and Fabio Verona",
note = "Funding Information: We thank Amit Goyal for kindly providing the data on his webpage; Rossen Valkanov (editor) and an anonymous referee for insightful comments that strongly improved the paper; Gene Ambrocio, Jo{\~a}o Correia da Silva, Eleonora Granziera, Adam Gulan, Esa Jokivuolle, Mikael Juselius, Donald Percival and seminar participants at the Bank of Finland for useful comments; Teppo Tammisto and Riccardo Verona for IT support; and Gregory Moore for editorial assistance. The views expressed are those of the authors and do not necessarily reflect those of the Bank of Finland. Faria gratefully acknowledges financial support from Funda{\c c}{\~a}o para a Ci{\^e}ncia e Tecnologia through project UID/GES/00731/2016. Funding Information: We thank Amit Goyal for kindly providing the data on his webpage; Rossen Valkanov (editor) and an anonymous referee for insightful comments that strongly improved the paper; Gene Ambrocio, Jo{\~a}o Correia da Silva, Eleonora Granziera, Adam Gulan, Esa Jokivuolle, Mikael Juselius, Donald Percival and seminar participants at the Bank of Finland for useful comments; Teppo Tammisto and Riccardo Verona for IT support; and Gregory Moore for editorial assistance. The views expressed are those of the authors and do not necessarily reflect those of the Bank of Finland. Faria gratefully acknowledges financial support from Funda{\c c}{\~a}o para a Ci{\^e}ncia e Tecnologia through project UID/GES/00731/2016 . Publisher Copyright: {\textcopyright} 2017 Elsevier B.V.",
year = "2018",
month = jan,
doi = "10.1016/j.jempfin.2017.11.009",
language = "English",
volume = "45",
pages = "228--242",
journal = "Journal of Empirical Finance",
issn = "0927-5398",
publisher = "Elsevier B.V.",
}