Out-of-Sample Equity Premium Predictability and Sample Split Invariant Inference

57 Pages Posted: 20 Mar 2012 Last revised: 14 Apr 2014

See all articles by Gueorgui I. Kolev

Gueorgui I. Kolev

EDHEC Business School

Rasa Karapandza

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting; New York University (NYU) - New York University, Abu Dhabi

Date Written: March 15, 2012

Abstract

For a comprehensive set of 21 equity premium predictors we find dramatic disagreement between out-of-sample predictability results depending on the choice of the sample split date. To resolve this issue we propose reporting in graphical form the out-of-sample predictability criteria for every possible sample split, and two out-of-sample tests that are invariant to the sample split choice. We provide Monte Carlo evidence for the validity of the bootstrap based inference we propose. We find that many investors making decisions in real time could have benefited from conditional predictions. The in-sample, and the sample split invariant out-of-sample mean and maximum tests that we propose, are in broad agreement. We also show how one can construct sample split invariant out-of-sample predictability tests that simultaneously control for data mining across many variables.

Keywords: Equity premium predictability, Out-of-sample inference, Sample split choice, Bootstrap

JEL Classification: G12, G14, G17, C22, C53

Suggested Citation

Kolev, Gueorgui I. and Karapandza, Rasa, Out-of-Sample Equity Premium Predictability and Sample Split Invariant Inference (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024573 or http://dx.doi.org/10.2139/ssrn.2024573

Gueorgui I. Kolev (Contact Author)

EDHEC Business School ( email )

24 avenue Gustave Delory
CS 50411
ROUBAIX CEDEX 1, F- 59057
France
+33 (0) 320 154 558 (Phone)

Rasa Karapandza

EBS Universität für Wirtschaft und Recht - EBS Business School - Department of Finance and Accounting ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

New York University (NYU) - New York University, Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

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