Abstract:
This article evaluates the predictability of the equity risk premium in
the United States by comparing the individual and complementary predictive
power of macroeconomic variables and technical indicators using a comprehensive
set of 16 economic and 14 technical predictors over a monthly out-ofsample
period of 1995:01 to 2012:12 and an in-sample period of 1986:01-
1994:12. In order to do so we consider, in addition to the set of variables used
in Christopher J. Neely et al. (2013) and using a more recent dataset, the forecasting
ability of two other important variables namely government shutdown
and debt ceiling. Our results show that one of the newly added variables namely
government shutdown provides statistically significant out-of-sample predictive
power over the equity risk premium relative to the historical average. Most
of the variables, including government shutdown, also show significant economic
gains for a risk averse investor especially during recessions.
