Publication Type

Conference Paper

Publication Date

7-2017

Abstract

This paper proposes a two-state predictive regression model and shows that stock market 12-month return (TMR), the time-series momentum predictor of Moskowitz, Ooi, and Pedersen (2012), forecasts the aggregate stock market negatively in good times and positively in bad times. The out-of-sample R-squares are 0.96% and 1.72% in good and bad times, or 1.28% and 1.41% in NBER economic expansions and recessions, respectively. The TMR predictability pattern holds in the cross-section of U.S. stocks and the international markets. Our study shows that the absence of return predictability in good times, an important finding of recent studies, is largely driven by the use of the popular one-state predictive regression model.

Keywords

Return predictability, Mean reversion, Momentum, Market risk premium, Leading economic indicator, 200-day moving average, Business cycle

Discipline

Finance | Finance and Financial Management

Research Areas

Finance

Publication

27th Australasian Finance and Banking Conference 2014, Sydney, Australia, 2017 July 31

Identifier

10.2139/ssrn.2188989

Publisher

SAGE

City or Country

Sydney, Australia

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.2139/ssrn.2188989

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