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Stock market "prediction" models

Author

Listed:
  • Garry L. Shelley

    (East Tennessee State University)

  • Anca Traian

    (East Tennessee State University)

  • William J. Trainor Jr.

    (East Tennessee State University)

Abstract

This study compares the equity allocation model relative to the more popular PE, Shiller CAPE, yield spread, Fed Model, and Buffet's Ratio (Market Cap/GDP) to predict long-term stock market returns. Although all the variables are related to long-run stock returns, only equity allocation and yield spread have root mean square errors consistently lower than a simple moving average. A simple trading rule transferring wealth between equity and 10-year T-bonds demonstrates equity allocation performs best with a 1.3% annual outperformance relative to buy-and-hold from 1990 to 2018. However, the predictive ability of the ratio was not identified until 2013 and since then, the trading strategy has underperformed by 1.5% annually. Thus, despite equity allocation's initial glamour, its long-term predictive ability does not appear to be easily transformed into profitable trading.

Suggested Citation

  • Garry L. Shelley & Anca Traian & William J. Trainor Jr., 2020. "Stock market "prediction" models," Economics Bulletin, AccessEcon, vol. 40(2), pages 1548-1556.
  • Handle: RePEc:ebl:ecbull:eb-20-00486
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2020/Volume40/EB-20-V40-I2-P133.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Market Forecasting; Equity Allocation; Shiller PE; Buffet Ratio; Fed Model;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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