Can economic uncertainty, financial stress and consumer sentiments predict U.S. equity premium?

Abstract

This article attempts to examine whether the equity premium in the United States can be predicted from a comprehensive set of 18 economic and financial predictors over a monthly out-of-sample period of 2000:2 to 2011:12, using an in-sample period of 1990:2-2000:1. To do so, we consider, in addition to the set of variables used in Rapach and Zhou (2013), the forecasting ability of four other important variables: the US economic policy uncertainty, the equity market uncertainty, the University of Michigan's index of consumer sentiment, and the Kansas City Fed's financial stress index. Using a more recent dataset compared to that of Rapach and Zhou (2013), our results from predictive regressions show that the newly added variables do not play any significant statistical role in explaining the equity premium relative to the historical average benchmark over the out-of-sample horizon, even though they are believed to possess valuable informative content about the state of the economy and financial markets. Interestingly, however, barring the economic policy uncertainty index, the three other indexes considered in this study yields economically significant out-of-sample gains, especially during recessions, when compared to the historical benchmark.JEL classification: C22, C38, C53, C58, E32, G11, G12, G14, G17.

Incorporating economic policy uncertainty in US equity premium models: A nonlinear predictability analysis

“…This result was similarly reported by Gupta et al (2014). However, given the evidence non-normality and nonlinearity, the results of the benchmark linear model cannot be robustly relied upon, hence we move on to the quantile predictive regression model.…”

“…Primarily in-sample empirical evidence in this regard can be found in Antonakakis et al, (2013), Kang and Ratti (2013), Gupta et al,(2014), Bekiros et al, (2015), Chang et al, (2015) and Jurado et al, (2015). 1 Against this backdrop, and under the widely held view that predictive models require out-of-sample validation (Rapach and Zhou, 2013), the objective of this paper is to investigate whether the news-based measure of economic policy uncertainty (EPU) introduced by Baker et al (2013) could help in forecasting the S&P500-based equity premium.…”

Does Economic Policy Uncertainty Predict Exchange Rate Returns and Volatility? Evidence from a Nonparametric Causality-in-Quantiles Test

“…In the process, we contribute to a recent, but growing literature that has originated in the wake of the "Great Recession", whereby studies have aimed to develop various tangible measures of uncertainty (see Strobel (2015) for a detailed literature review on alternative methods of measuring uncertainty), and then in turn, have analysed the ability of these measures of uncertainty to predict movements in macroeconomic variables (Balcilar, Gupta and Jooste, 2014;Karnizova and Li, 2014;Balcilar, Gupta and Segnon, 2015), equity markets (Gupta et al, 2014;Balcilar, Gupta, Kim and Kyei, 2015;Balcilar, Gupta, Modise and Muteba Mwamba, 2015;Bekiros, Gupta and Majumdar, 2015;Brogaard and Detzel, 2015;Balcilar, Gupta and Kyei, forthcoming;Bekiros et al, forthcoming;Li et al, forthcoming), housing markets (El Montasser et al, forthcoming; André et al, forthcoming), and commodity markets (Bekiros, Gupta and Paccagnini, 2015;Balcilar, Gupta and Pierdzioch, 2015;Andreasson et al, forthcoming;Balcilar et al, forthcoming), and uncertainty itself . Interestingly, as far as the relationship between uncertainty on exchange rate returns and volatility is concerned, it is limited to only few conditional-mean based studies.…”

How Can We Increase Shareholder' Wealth? An Empirical Validation from European Countries

“…Our paper test how managers can increase shareholder's wealth (Harvey, 1995;Dicle et al, 2010;Hjalmarsson, 2010;Gupta and Modise, 2012;Narayan and Bannigidadmath, 2015;Narayan et al, 2015b;Westerlund et al, 2015;Fama and French, 1988;Lamont, 1998;Welch and Goyal, 2008;Rapach et al, 2010 andGupta et al, 2014). We measure firm value by Tobin's Q and market to book ratios.…”