The Economic Benefit of Forecasting Market Components for Mean-Variance Investors


Existing studies focus on variables’ predictive quality with respect to the aggregated stock market, which per definition contains a minimum level of idiosyncratic risk and provides a favorable environment for such applications. Economic intuition suggests that the level of out-of-sample predictability decreases as we climb down the ladder from market aggregates to industries and ultimately single stock returns. Thereon, we ask the central question: ‘Do forecasting errors from direct predictions of market components out-way the additional errors introduced by an intermediary asset pricing model?’ This is an early stage research note and we welcome any feedback and comments.

Working Paper
Sebastian Stöckl
Sebastian Stöckl
Assistant Professor in Financial Economics (tenure-track)

My research interests include Financial and Economic Uncertainty as well as Empirical Asset Pricing.