We study equity premium out-of-sample predictability by extracting the information contained in a high number of macroeconomic predictors via large dimensional factor models. We compare the well-known factor model with a static representation of the common components with the Generalized Dynamic Factor Model, which accounts for time series dependence in the common components. Using statistical and economic evaluation criteria, we empirically show that the Generalized Dynamic Factor Model helps predicting the equity premium. Exploiting the link between business cycle and return predictability, we find accurate predictions also by combining rolling and recursive forecasts in real-time.
机构:
Univ Vigo, Dept Stat, ETSEM, Vigo 36310, SpainUniv Santiago de Compostela, Dept Econ, Santiago De Compostela 15782, Spain
Matias, Jose M.
Reboredo, Juan C.
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机构:
Univ Santiago de Compostela, Dept Econ, Santiago De Compostela 15782, SpainUniv Santiago de Compostela, Dept Econ, Santiago De Compostela 15782, Spain
机构:
Department of Accounting and Finance, University of Strathclyde, Curran Building, Glasgow G4 0LNDepartment of Accounting and Finance, University of Strathclyde, Curran Building, Glasgow G4 0LN