On the out-of-sample predictability of stock market returns

In this paper, I provide new evidence of the out-of-sample predictability of stock returns. In particular, I find that the consumption-wealth ratio in conjunction with a measure of aggregate stock market volatility exhibits substantial out-of-sample forecasting power for excess stock market returns. Also, simple trading strategies based on the documented predictability generate returns of higher mean and lower volatility than the buy-and-hold strategy does, and this difference is economically important.