The Economic Value of Predicting Stock Index Returns and Volatility

W. Marquering, M.J.C.M. Verbeek

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Abstract

In this paper, we analyze the economic value of predicting index returns as well as volatility. On the basis of fairly simple linear models, estimated recursively, we produce genuine out-of-sample forecasts for the return on the S&P 500 index and its volatility. Using monthly data from 1954-1998, we test the statistical significance of return and volatility predictably and examine the economic value of a number of alternative trading strategies. We find strong evidence for market timing in both returns and volatility. Joint tests indicate no dependence between return and volatility timing, while it appears easier to forecast returns when volatility is high. For a mean-variance investor, this predictably is economically profitable, even if short sales are not allowed and transaction costs are quite large.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages49
Volume2000-78
Publication statusPublished - 2000

Publication series

NameCentER Discussion Paper
Volume2000-78

Keywords

  • Predicability of stock returns and volatility

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