Out-of-sample return predictability: a quantile combination approach

Citation
Lima, Luiz Renato et Meng, Fanning, Out-of-sample return predictability: a quantile combination approach, Journal of applied econometrics , 32(4), 2017, pp. 877-895
ISSN journal
08837252
Volume
32
Issue
4
Year of publication
2017
Pages
877 - 895
Database
ACNP
SICI code
Abstract
This paper develops a novel forecasting method that minimizes the effects of weak predictors and estimation errors on the accuracy of equity premium forecasts. The proposed method is based on an averaging scheme applied to quantiles conditional on predictors selected by LASSO. The resulting forecasts outperform the historical average, and other existing models, by statistically and economically meaningful margins.