Time-frequency forecast of the equity premium

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Title: Time-frequency forecast of the equity premium
ISBN: 978-952-323-325-6
Author: Faria, Gonçalo ; Verona, Fabio
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2020
Series number: 6/2020
Year of publication: 2020
Publication date: 27.4.2020
Pages: 42
Subject (yso): ennusteet; aikasarjat; menetelmät; arvopaperimarkkinat; osakkeet
JEL: C58; G11; G17
Other keywords: time-frequency forecast; equity premium; multiresolution analysis
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 stock market's 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, this method significantly improves in both statistical and economic sense upon standard time series forecasting methods. This improvement is robust regardless of the predictor used, the out-of-sample period considered, and the frequency of the data used.
Rights: https://helda.helsinki.fi/bof/copyright


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