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Equity Premium Prediction: Are Economic and Technical Indicators Unstable?

Aufsätze referiert extern - Web of Science

Fabian Baetje, Lukas Menkhoff

In: International Journal of Forecasting 32 (2016), 4, S. 1193-1207


We show that technical indicators deliver stable economic value in predicting the US equity premium over the out-of-sample period from 1966 to 2014. The results tentatively improve over time, and beat alternatives over a large continuum of sub-periods. In contrast, economic indicators work well only until the 1970s, but lose predictive power thereafter, even when considering the last crisis. Translating the predictive power of technical indicators into a standard investment strategy delivers an annualized average Sharpe ratio of 0.55 p.a. (after transaction costs) for investors who entered the market at any point in time.

Lukas Menkhoff

Head of Department in the International Economics Department

Keywords: Equity premium predictability, Economic indicators, Technical indicators, Break tests