Out-of-sample stock return predictability in Australia

Authors

Yiwen Dou, Macquarie University
David R. Gallagher, Macquarie Graduate School of Management
David Schneider, UniSuper Management Limited
Terry S. Walter, University of Technology SydneyFollow

RIS ID

114884

Publication Details

Dou, Y. (Paul)., Gallagher, D. R., Schneider, D. H. & Walter, T. S. (2012). Out-of-sample stock return predictability in Australia. Australian Journal of Management, 37 (3), 461-479.

Abstract

We provide one of the first comprehensive studies on out-of-sample stock returns predictability in Australia. While most of the empirically well-known predictive variables fail to generate out-of-sample predictability, we document a significant out-of-sample prediction in forecasting ahead one-year and, to a lesser extent, one-quarter future excess returns, using a combination forecast of variables. We also find improved asset allocation using the combination forecast of these predictors. The combining methods are useful in predicting sector premia. Specifically, a sector rotation strategy relying on the combining methods outperforms the market by 3.27% per annum on a risk-adjusted basis.