Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7362436 | Journal of Financial Markets | 2018 | 63 Pages |
Abstract
Asset allocation is critically dependent on the ability to forecast the equity risk premium (ERP) out-of-sample. But, is superior econometric predictability across the business cycle synonymous with predictability at all times? We evaluate recently introduced ERP forecasting models, which have been shown to generate econometrically superior ERP forecasts, and find that their forecasting ability is regime-dependent. They give rise to significant relative losses during market downturns, when it matters the most for asset allocators to retain assets and their client base intact. Conversely, any economic benefit occurring during market upswings is diminished for high risk-averse and leverage-constrained investors.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Nick Baltas, Dimitrios Karyampas,