Modeling stock index returns by means of partial least-squares methods: An out-of-sample analysis for three stock markets
✍ Scribed by Cetin-Behzet Cengiz; Helmut Herwartz
- Publisher
- John Wiley and Sons
- Year
- 2010
- Tongue
- English
- Weight
- 498 KB
- Volume
- 27
- Category
- Article
- ISSN
- 1524-1904
- DOI
- 10.1002/asmb.826
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✦ Synopsis
We analyze the underlying economic forces of the stock markets in Germany, the U.K. and the U.S. Identifying a number of variables evincing return predictability, we follow a partial least-squares (PLS) approach to combine these observables into a few latent factors. Conditional on European markets, our findings indicate (i) superior prediction performance of PLS-based schemes in comparison with both, a random walk and a first-order autoregressive benchmark model, (ii) consistent profitable trading on the German and British market, (iii) profitable linear forecast combinations, (iv) the U.S. stock market is diagnosed as informationally efficient.