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Forecasting the future state of the economy in the United States: The role of tradable “new” risk factors

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  • Qi Shi
  • Bin Li

Abstract

We investigate the predictive power of several innovative tradable risk factors that have proved to be competent factors in recent asset pricing studies. Our evidence indicates that all these risk factors can predict the future state of the economy to some significant extent, and they appear to perform better in short‐horizon than in long‐horizon forecasting. Using a bootstrap simulation, our estimations of bootstrapped critical values robustly reject the criticism that our significance of statistics is overstated or understated. Such results lend support to Cochrane's argument: that a competent pricing risk factor in a plausible pricing kernel may predict the future state of economy.

Suggested Citation

  • Qi Shi & Bin Li, 2021. "Forecasting the future state of the economy in the United States: The role of tradable “new” risk factors," International Review of Finance, International Review of Finance Ltd., vol. 21(3), pages 1039-1046, September.
    • Handle: RePEc:bla:irvfin:v:21:y:2021:i:3:p:1039-1046
    DOI: 10.1111/irfi.12300
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    References listed on IDEAS

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    3. Horowitz, J., 1996. "Bootstrap Critical Values For Tests Based On The Smoothed Maximum Score Estimator," SFB 373 Discussion Papers 1996,44, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
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    5. Hall, Peter & Horowitz, Joel L, 1996. "Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators," Econometrica, Econometric Society, vol. 64(4), pages 891-916, July.
    6. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    7. Maio, Paulo & Santa-Clara, Pedro, 2012. "Multifactor models and their consistency with the ICAPM," Journal of Financial Economics, Elsevier, vol. 106(3), pages 586-613.
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    9. Joel L. Horowitz, 1996. "Bootstrap Critical Values for Tests Based on the Smoothed Maximum Score Estimator," Econometrics 9603003, University Library of Munich, Germany.
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    Cited by:

    1. Shi, Qi, 2023. "The RP-PCA factors and stock return predictability: An aligned approach," The North American Journal of Economics and Finance, Elsevier, vol. 64(C).

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