Forecasting Returns: New European Evidence

Abstract

This paper builds on the recent debate on the in-sample and out-of-sample predictability of US aggregate returns using a wide range of predictors by providing new evidence for smaller and less market-oriented European countries.

We find evidence that macro and technical predictors can (statistically) improve forecast accuracy and (economically) generate gains to investors; in contrast to the US results, predictability in our sample of European countries exists in recent data. We also find that simple forecast combinations consistently yield substantial benefits both in forecast accuracy and economic gain. For example, the magnitude of the forecasting gains for our European countries is often larger than those found for the US and other G7 countries. We provide initial evidence on the link between country characteristics and out-of-sample forecast performance. Our empirical results suggest forecast performance is not strongly related to market size. However market liquidity is related to the forecast performance of fundamental variables and market development is related to the forecast performance of macro variables.

Keywords: Return forecasting, Fundamental ratios, Macro variables, Technical indicators, Europe, Emerging markets

JEL Classification: F00, F21, F47, G12, G15, N20