Incorporating economic policy uncertainty in US equity premium models : a nonlinear predictability analysis

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Authors

Bekiros, Stelios
Gupta, Rangan
Majumdar, Anandamayee

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Publisher

Elsevier

Abstract

Information on economic policy uncertainty does matter in predicting the US equity premium, especially when accounting for structural instabilities and omitted nonlinearities in their relationship, via a quantile predictive regression approach over the monthly period 1900:1–2014:2. Unlike as suggested by a linear mean-based predictive model, the extended quantile regression model with the incorporation of the EPU proxy, enhances significantly the out-of-sample stock return predictability. This is observed especially when the market is neutral, exhibits a slide or mildly upward trending behavior, yet not when the market appears to turn highly bullish.

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Keywords

Stock markets, Economic uncertainty, Predictability, Quantile regression

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Citation

Bekiros, S, Gupta, R & Majumdar, A 2016, 'Incorporating economic policy uncertainty in US equity premium models : a nonlinear predictability analysis', Finance Research Letters, vol. 18, pp. 291-296.