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This paper shows that the equity premium is predictable out of sample when we use a predictive regression that conditions on a large set of economic fundamentals, subject to: (i) economic constraints on the sign of coe¢ cients and return forecasts, and (ii) statistical constraints imposed by shrinkage estimation. Equity premium predictability delivers a certainty equivalent return of about 2:7% per year over the benchmark for a mean-variance investor. Our predictive framework outperforms a large group of competing models that also condition on economic fundamentals as well as models that condition on technical indicators.

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent AbstractUnderstanding what drives international portfolio ‡ows has important policy implications for countries wishing to exert some control on the size, direction and volatility of the ‡ows. This paper empirically assesses the relative contribution of common (push) and country-speci…c (pull) factors to the variation of bond and equity ‡ows from the US to 55 other countries. Using a Bayesian dynamic latent factor model, we …nd that more than 80% of the variation in bond and equity ‡ows is due to push factors from the US to other countries. Hence global economic forces seem to prevail over domestic economic forces in explaining movements in international portfolio ‡ows. The dynamics of push and pull factors can be partially explained by US and foreign economic fundamentals.