On the statistical and economic performance of stock return predictive regression models: an international perspective

Abstract

The predictability of stock returns is assessed in ten countries using the linear predictive
regression framework. We use recently developed out-of-sample statistical tests and
include both valuation ratios and interest rates as predictive variables. Contrary to previous
studies, we explicitly address the issue of the small-sample bias, deal with trading
profitability, and employ several risk-adjusted metrics. When statistical forecastability
is found, it cannot be exploited to consistently deliver abnormal returns across countries
and investment horizons. We hold the view that returns are predictable to some extent
but show that such forecasts are not useful for portfolio advice.

Keywords: predictability, profitability, efficiency, out-of-sample.

JEL Classification: C15, C22, C53, G14