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Evaluation of current research on stock return predictability

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  • Erhard Reschenhofer
  • Manveer Kaur Mangat
  • Christian Zwatz
  • Sándor Guzmics

Abstract

The results of recent replication studies suggest that false positive findings are a big problem in empirical finance. We contribute to this debate by reviewing a sample of articles dealing with the short‐term directional forecasting of the prices of stocks, commodities, and currencies. Screening all relevant articles published in 2016 by one of the 96 journals covered by the Social Sciences Citation Index in the category “Business, Finance,” we select only those studies that use easily accessible data of daily or higher frequency. We examine each study in detail, from the selection of the dataset to the interpretation of the results. We also include empirical analyses to illustrate the shortcomings of certain approaches. There are three main findings from our review. First, the number of selected papers is very low, which is surprising even when the strict selection criteria are taken into account. Second, there are hardly any relevant studies that use high‐frequency data—despite the hype about financial big data and machine learning. Third, the economic significance of the findings—for example, their usefulness for trading purposes—is questionable. In general, apparently good forecasting performance does not translate into profitability once realistic transaction costs and the effect of data snooping are taken into account. Other typical problems include unsuitable benchmarks, short evaluation periods, and nonoperational trading strategies.

Suggested Citation

  • Erhard Reschenhofer & Manveer Kaur Mangat & Christian Zwatz & Sándor Guzmics, 2020. "Evaluation of current research on stock return predictability," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(2), pages 334-351, March.
  • Handle: RePEc:wly:jforec:v:39:y:2020:i:2:p:334-351
    DOI: 10.1002/for.2629
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    2. Salo, Ahti & Doumpos, Michalis & Liesiö, Juuso & Zopounidis, Constantin, 2024. "Fifty years of portfolio optimization," European Journal of Operational Research, Elsevier, vol. 318(1), pages 1-18.

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