Out‐of‐Sample Return Predictability: A Quantile Combination Approach
Journal of Applied Econometrics
Published online on October 11, 2016
Abstract
This paper develops a novel forecasting method that minimizes the effects of weak predictors and estimation errors on the accuracy of equity premium forecasts. The proposed method is based on an averaging scheme applied to quantiles conditional on predictors selected by LASSO. The resulting forecasts outperform the historical average, and other existing models, by statistically and economically meaningful margins. Copyright © 2016 John Wiley & Sons, Ltd.