Incorporating economic policy uncertainty in US equity premium models : a nonlinear predictability analysis
Title: Incorporating economic policy uncertainty in US equity premium models : a nonlinear predictability analysis
Citation: Finance research letters, 2016, Vol. 18, pp. 291-296
Information on economic policy uncertainty does matter in predicting the US equity premium, especially when accounting for structural instabilities and omitted nonlinearities in their relationship, via a quantile predictive regression approach over the monthly period 1900:1-2014:2. Unlike as suggested by a linear mean-based predictive model, the extended quantile regression model with the incorporation of the EPU proxy, enhances significantly the out-of-sample stock return predictability. This is observed especially when the market is neutral, exhibits a slide or mildly upward trending behavior, yet not when the market appears to turn highly bullish.
Subject: Stock markets; Economic uncertainty; Predictability; Quantile regression; C22; C53; E60; G10
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