RSM318H1 Chapter Notes - Chapter Welch, Goyal: United States Treasury Security, Corporate Bond, Statistical Significance
Document Summary
Week 2: welch, goyal, a comprehensive look at the empirical performance of equity premium prediction. Comprehensive re-examination of performance of variables suggested by academic literature to be good predictors of equity premium. Find models have predicted poorly both in-sample and out-of-sample. Different methods used in different papers, results change if different time periods studied. Many models depended on oil shock of 1970s for statistical significance. Total rate of return on stock market minus prevailing short term interest rate. 12-month moving sum of earnings on s&p 500. 12-month moving sums of dividends paid on s&p 500. Relative valuation of high and low beta stocks. Sum of squared daily returns of s&p 500. Well-specified signal would have: a. b. c. d. Both significant is and reasonably good oos performance over entire sample period. Upward drift that occurs not just in one short or unusual sample period. Upward drift that remains positive over most recent several decades.
