The Economic Value of Predicting Stock Index Returns and Volatility

WA (Wessel) Marquering, Marno Verbeek

Research output: Contribution to journalArticleAcademicpeer-review

172 Citations (Scopus)

Abstract

In this paper, we analyze the economic value of predicting stock index returns as well as volatility. On the basis of simple linear models, estimated recursively, we produce out-of-sample forecasts for the return on the S&P 500 index and its volatility. Using monthly data, we examine the economic value of a number of alternative trading strategies over the period 1970–2001. It appears easier to forecast returns at times when volatility is high. For a mean-variance investor, this predictability is economically profitable, even if short sales are not allowed and transaction costs are quite large. The economic value of trading strategies that employ market timing in returns and volatility exceeds that of strategies that only employ timing in returns. Most of the profitability of the dynamic strategies, however, is located in the first half of our sample period.
Original languageEnglish
Pages (from-to)407-429
Number of pages23
JournalJournal of Financial and Quantitative Analysis
Volume39
Issue number2
DOIs
Publication statusPublished - 2004

Research programs

  • RSM F&A

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