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  • GMS2021_JEF_Revision_DM_AG_SS_rev_AG_June152021_app

    Rights statement: This is the author’s version of a work that was accepted for publication in Journal of Empirical Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Empirical Finance, 63, 2021 DOI: 10.1016/j.jempfin.2021.07.009

    Accepted author manuscript, 3.52 MB, PDF document

    Embargo ends: 18/01/23

    Available under license: CC BY-NC-ND

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Forecasting stock returns with large dimensional factor models

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<mark>Journal publication date</mark>30/09/2021
<mark>Journal</mark>Journal of Empirical Finance
Volume63
Number of pages18
Pages (from-to)252-269
Publication StatusPublished
Early online date18/07/21
<mark>Original language</mark>English

Abstract

We study equity premium out-of-sample predictability by extracting the information contained in a high number of macroeconomic predictors via large dimensional factor models. We compare the well-known factor model with a static representation of the common components with the Generalized Dynamic Factor Model, which accounts for time series dependence in the common components. Using statistical and economic evaluation criteria, we empirically show that the Generalized Dynamic Factor Model helps predicting the equity premium. Exploiting the link between business cycle and return predictability, we find accurate predictions also by combining rolling and recursive forecasts in real-time.

Bibliographic note

This is the author’s version of a work that was accepted for publication in Journal of Empirical Finance. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in Journal of Empirical Finance, 63, 2021 DOI: 10.1016/j.jempfin.2021.07.009