Forecasting returns: New European evidence

•New evidence on out-of-sample (OOS) predictability for European countries.•OOS Forecast gains in European countries often larger than prior US literature.•Macro and technical predictors improve forecast accuracy and economic value.•Forecast value is related to market development, size and liquidity.•Simple average combination technique provides most consistent OOS performance.

This paper builds on the recent debate on the in-sample and out-of-sample predictability of US aggregate returns using a wide range of predictors by providing new evidence for smaller and less market-oriented European countries.We find evidence that macro and technical predictors can (statistically) improve forecast accuracy and (economically) generate gains to investors; in contrast to the US results, predictability in our sample of European countries exists in recent data. We also find that simple forecast combinations consistently yield substantial benefits both in forecast accuracy and economic gain. For example, the magnitude of the forecasting gains for our European countries is often larger than those found for the US and other G7 countries. We provide initial evidence on the link between country characteristics and out-of-sample forecast performance. Our empirical results indicate that market development is related to the forecast performance of macro variables. There is also some evidence that forecast performance is related to market size and liquidity.