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Garry L. Shelley, Anca Traian and William J. Trainor Jr.
''Stock market "prediction" models''
( 2020, Vol. 40 No.2 )
This study compares the equity allocation model relative to the more popular PE, Shiller CAPE, yield spread, Fed Model, and Buffet's Ratio (Market Cap/GDP) to predict long-term stock market returns. Although all the variables are related to long-run stock returns, only equity allocation and yield spread have root mean square errors consistently lower than a simple moving average. A simple trading rule transferring wealth between equity and 10-year T-bonds demonstrates equity allocation performs best with a 1.3% annual outperformance relative to buy-and-hold from 1990 to 2018. However, the predictive ability of the ratio was not identified until 2013 and since then, the trading strategy has underperformed by 1.5% annually. Thus, despite equity allocation's initial glamour, its long-term predictive ability does not appear to be easily transformed into profitable trading.
Keywords: Market Forecasting, Equity Allocation, Shiller PE, Buffet Ratio, Fed Model
Manuscript Received : May 20 2020 Manuscript Accepted : Jun 07 2020

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