Critical Finance Review > Vol 11 > Issue 1

Equity Premium Forecasts Tend to Perform Worse Against a Buy-and-Hold Benchmark

Gunter Löffler, Ulm University, Germany, gunter.loeffler@uni-ulm.de
 
Suggested Citation
Gunter Löffler (2022), "Equity Premium Forecasts Tend to Perform Worse Against a Buy-and-Hold Benchmark", Critical Finance Review: Vol. 11: No. 1, pp 65-77. http://dx.doi.org/10.1561/104.00000110

Publication Date: 21 Feb 2022
© 2022 Gunter Löffler
 
Subjects
 
Keywords
G12G17
Equity premiumPredictabilityOut-of-sampleUtility gains
 

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In this article:
1. Assessing and Testing the Economic Value of Equity Premium Predictions 
2. Attractiveness of the Buy-and-Hold Benchmark 
3. Impact of Benchmark Choice on Published Results 
4. Concluding Remarks 
References 

Abstract

The economic gains from using equity premium forecasts are usually assessed by comparing a forecast-based strategy to a strategy based on the trailing historical mean. Whether these economic gains are statistically significant remains mostly untested. This paper shows that a buy-and-hold benchmark can be much harder to beat than the historical-mean benchmark and that the practice of not testing the statistical significance of economic gains can lead to questionable conclusions. The findings rest on an examination of many hypothetical sample periods and the replication of two widely cited papers (Rapach et al., 2010, 2016).

DOI:10.1561/104.00000110