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Forecasting the Equity Risk Premium: The Role of Technical Indicators
Academic research relies extensively on macroeconomic variables to forecast the U.S. equity risk premium, with relatively little attention paid to the technical indicators widely employed by practitioners. Our paper fills this gap by comparing the predictive ability of technical indicators with that of macroeconomic variables. Technical indicators display statistically and economically significant in-sample and out-of-sample predictive power, matching or exceeding that of macroeconomic variables. Furthermore, technical indicators and macroeconomic variables provide complementary information over the business cycle: technical indicators better detect the typical decline in the equity risk premium near business-cycle peaks, whereas macroeconomic variables more readily pick up the typical rise in the equity risk premium near cyclical troughs. Consistent with this behavior, we show that combining information from both technical indicators and macroeconomic variables significantly improves equity risk premium forecasts versus using either type of information alone. Overall, the substantial countercyclical fluctuations in the equity risk premium appear well captured by the combined information in technical indicators and macroeconomic variables.
Data, as supplemental material, are available at
http://dx.doi.org/10.1287/mnsc.2013.1838
.
This paper was accepted by Wei Jiang, finance.
Journal Article
Increased adoption of best practices in ecological forecasting enables comparisons of forecastability
Near-term iterative forecasting is a powerful tool for ecological decision support and has the potential to transform our understanding of ecological predictability. However, to this point, there has been no cross-ecosystem analysis of near-term ecological forecasts, making it difficult to synthesize diverse research efforts and prioritize future developments for this emerging field. In this study, we analyzed 178 near-term (≤10-yr forecast horizon) ecological forecasting papers to understand the development and current state of near-term ecological forecasting literature and to compare forecast accuracy across scales and variables. Our results indicated that near-term ecological forecasting is widespread and growing: forecasts have been produced for sites on all seven continents and the rate of forecast publication is increasing over time. As forecast production has accelerated, some best practices have been proposed and application of these best practices is increasing. In particular, data publication, forecast archiving, and workflow automation have all increased significantly over time. However, adoption of proposed best practices remains low overall: for example, despite the fact that uncertainty is often cited as an essential component of an ecological forecast, only 45% of papers included uncertainty in their forecast outputs. As the use of these proposed best practices increases, near-term ecological forecasting has the potential to make significant contributions to our understanding of forecastability across scales and variables. In this study, we found that forecastability (defined here as realized forecast accuracy) decreased in predictable patterns over 1–7 d forecast horizons. Variables that were closely related (i.e., chlorophyll and phytoplankton) displayed very similar trends in forecastability, while more distantly related variables (i.e., pollen and evapotranspiration) exhibited significantly different patterns. Increasing use of proposed best practices in ecological forecasting will allow us to examine the forecastability of additional variables and timescales in the future, providing a robust analysis of the fundamental predictability of ecological variables.
Journal Article
Forecast Uncertainty-Ex Ante and Ex Post: U.S. Inflation and Output Growth
Survey respondents who make point predictions and histogram forecasts of macro-variables reveal both how uncertain they believe the future to be, ex ante, as well as their ex post performance. Macroeconomic forecasters tend to be overconfident at horizons of a year or more, but overestimate (i.e., are underconfident regarding) the uncertainty surrounding their predictions at short horizons. Ex ante
uncertainty remains at a high level compared to the ex post measure as the forecast horizon shortens. There is little evidence of a link between individuals' ex post forecast accuracy and their ex ante
subjective assessments.
Journal Article
Managerial Incentives and Management Forecast Precision
Managers have great discretion in determining forecast characteristics, but little is known about how managerial incentives affect these characteristics. This paper examines whether managers strategically choose forecast precision for self-serving purposes. Building on the prior finding that the market reaction to vague forecasts is weaker than its reaction to precise forecasts, we find that for management forecasts disclosed before insider sales, more positive (negative) news forecasts are more (less) precise than other management forecasts. The opposite applies to management forecasts disclosed before insider purchases. These results are consistent with managers strategically choosing forecast precision to increase stock prices before insider sales and to decrease stock prices before insider purchases. Additional analyses indicate that the impact of managerial incentives on forecast precision is less pronounced when institutional ownership is high or when disclosure risk is high, and is more pronounced when investors have difficulty in assessing the precision of managers' information.
Journal Article
Exchange Rate Predictability
The main goal of this article is to provide an answer to the question: does anything forecast exchange rates, and if so, which variables? It is well known that exchange rate fluctuations are very difficult to predict using economic models, and that a random walk forecasts exchange rates better than any economic model (the Meese and Rogoff puzzle). However, the recent literature has identified a series of fundamentals/methodologies that claim to have resolved the puzzle. This article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up-to-date, thorough empirical analysis. Overall, our analysis of the literature and the data suggests that the answer to the question: \"Are exchange rates predictable?\" is, \"It depends\"—on the choice of predictor, forecast horizon, sample period, model, and forecast evaluation method. Predictability is most apparent when one or more of the following hold: the predictors are Taylor rule or net foreign assets, the model is linear, and a small number of parameters are estimated. The toughest benchmark is the random walk without drift.
Journal Article