Journal Article

In-Sample and Out-of-Sample Properties of International Stock Return Dynamics Conditional on Equilibrium Pricing Factors

Authors

  • Helmut Herwartz
  • Leonardo Morales-Arias
Publication Date

We conduct a comprehensive analysis of the in-sample and out-of-sample properties of stock return dynamics in 14 developed and 12 emerging markets. We start by formulating a theoretically founded asset pricing model that decomposes log stock returns into equilibrium pricing factors (accounting and discount factors) and short-run (vector) autoregressive dynamics. Based on this model, we design both in-sample and out-of-sample panel modeling techniques to investigate international stock market returns at short and long horizons. Our findings show that (i) there is evidence of in-sample signaling from the equilibrium relations but this feature does not appear to translate into out-of-sample forecasting, (ii) a rolling window forecasting scheme can better approximate the distributional features of returns in comparison with a recursive method, (iii) forecasting with single lagged equilibrium relationships does not play a uniformly significant role in anticipating returns, (iv) forecasting with a full model containing all lagged equilibrium relations can outperform both a random walk model and a VAR(1) model and (v) linear combinations of alternative forecasts reduce ex-ante uncertainty.

Info

JEL Classification
G12, G15, E44

Key Words

  • dynamic heterogenous panels
  • forecast combination
  • International asset pricing
  • out-of-sample forecasting