Time-frequency forecast of the equity premium

Gonçalo Faria*, Fabio Verona

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)
33 Downloads

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 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 purposes, this method significantly improves in a statistical and economic way upon standard time series forecasting methods. This outperformance is robust regardless of the predictor used, the out-of-sample period considered, and the frequency of the data used.
Original languageEnglish
Pages (from-to)2119-2135
Number of pages17
JournalQuantitative Finance
Volume21
Issue number12
DOIs
Publication statusPublished - 2021

Keywords

  • Equity premium
  • Multiresolution analysis
  • Time-frequency forecast

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