Forecasting stock market returns by summing the frequency-decomposed parts

Gonçalo Faria, Fabio Verona*

*Autor correspondente para este trabalho

Resultado de pesquisarevisão de pares

39 Citações (Scopus)

Resumo

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.
Idioma originalEnglish
Páginas (de-até)228-242
Número de páginas15
RevistaJournal of Empirical Finance
Volume45
DOIs
Estado da publicaçãoPublicado - jan. 2018

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