The role of current account balance in forecasting the US equity premium : evidence from a quantile predictive regression approach

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dc.contributor.author Gupta, Rangan
dc.contributor.author Majumdar, Anandamayee
dc.contributor.author Wohar, Mark E.
dc.date.accessioned 2016-08-19T12:00:35Z
dc.date.issued 2017-02
dc.description.abstract The purpose of this paper is to investigate whether the current account balance can help in forecasting the quarterly S&P500-based equity premium out-of-sample. We consider an out-of-sample period of 1970:Q3 to 2014:Q4, with a corresponding in-sample period of 1947:Q2 to 1970:Q2. We employ a quantile predictive regression model. The quantilebased approach is more informative relative to any linear model, as it investigates the ability of the current account to forecast the entire conditional distribution of the equity premium, rather than being restricted just to the conditional-mean. In addition, we employ a recursive estimation of both the conditional-mean and quantile predictive regression models over the out-of-sample period which allows for time-varying parameters in the forecast evaluation part of the sample for both these models. Our results indicate that unlike as suggested by the linear (mean-based) predictive regression model, the quantile regression model shows that the (changes in the) real current account balance contains significant outof- sample information especially when the stock market is performing poorly (below the quantile value of 0.3), but not when the market is in normal to bullish modes (quantile value above 0.3). This result seems to be intuitive in the sense that, when the markets are performing average to well, that is performing around the median and above of the conditional distribution of the equity premium, the excess returns is inherently a randomwalk and hence, no information, from a predictor (changes in the real current account balance) is necessary. en_ZA
dc.description.department Economics en_ZA
dc.description.embargo 2018-02-26
dc.description.librarian hb2016 en_ZA
dc.description.uri http://link.springer.com/journal/11079 en_ZA
dc.identifier.citation Gupta, R., Majumdar, A. & Wohar, M.E. The role of current account balance in forecasting the US equity premium : evidence from a quantile predictive regression approach. Open Economies Review (2017) 28: 47-59. doi:10.1007/s11079-016-9408-x. en_ZA
dc.identifier.issn 0923-7992 (print)
dc.identifier.issn 1573-708X (online)
dc.identifier.uri http://hdl.handle.net/2263/56419
dc.language.iso en en_ZA
dc.publisher Springer en_ZA
dc.rights © Springer-Verlag 2016. The original publication is available at : http://link.springer.com/journal/11079. en_ZA
dc.subject Stock markets en_ZA
dc.subject Current account en_ZA
dc.subject Predictability en_ZA
dc.subject Quantile regression en_ZA
dc.title The role of current account balance in forecasting the US equity premium : evidence from a quantile predictive regression approach en_ZA
dc.type Postprint Article en_ZA


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