Forecasting stock returns in good and bad times: The role of market states

Forecasting stock returns in good and bad times: The role of market states

This paper proposes a two-state predictive regression model and shows that stock market 12-month return (TMR), the time-series momentum predictor of Moskowitz, Ooi, and Pedersen (2012), forecasts the aggregate stock market negatively in good times and positively in bad times. The out-of-sample R-squ...

Full description

Saved in:
Bibliographic Details
Main Authors: HUANG, Dashan, JIANG, Fuwei, Jun TU, ZHOU, Guofu
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2017
Subjects:
Return predictability
Mean reversion
Momentum
Market risk premium
Leading economic indicator
200-day moving average
Business cycle
Finance
Finance and Financial Management
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/5156
https://ink.library.smu.edu.sg/context/lkcsb_research/article/6155/viewcontent/SSRN_id2188989.pdf
Tags: Add Tag
No Tags, Be the first to tag this record!
Institution: Singapore Management University
Language: English
Description
Summary:This paper proposes a two-state predictive regression model and shows that stock market 12-month return (TMR), the time-series momentum predictor of Moskowitz, Ooi, and Pedersen (2012), forecasts the aggregate stock market negatively in good times and positively in bad times. The out-of-sample R-squares are 0.96% and 1.72% in good and bad times, or 1.28% and 1.41% in NBER economic expansions and recessions, respectively. The TMR predictability pattern holds in the cross-section of U.S. stocks and the international markets. Our study shows that the absence of return predictability in good times, an important finding of recent studies, is largely driven by the use of the popular one-state predictive regression model.

Similar Items