Predicting Stock Return with Economic Constraint: Can Interquartile Range Truncate the Outliers?

We find that imposing economic constraint on stock return forecasts based on the Interquartile Range of equity premium can significantly strengthen predictive performance. Specifically, we construct a judgment mechanism that truncates the outliers in forecasts of stock return. We prove that our cons...

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Published in:Mathematical problems in engineering 2021, Vol.2021, p.1-12
Main Authors: Dai, Zhifeng, Chang, Xiaoming
Format: Article
Language:English
Subjects:
Constraint modelling
Economic analysis
Investments
Model accuracy
Outliers (statistics)
Performance prediction
Portfolio performance
Risk aversion
Variables
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description We find that imposing economic constraint on stock return forecasts based on the Interquartile Range of equity premium can significantly strengthen predictive performance. Specifically, we construct a judgment mechanism that truncates the outliers in forecasts of stock return. We prove that our constraint approach can realize more accurate predictive information relative to the unconstraint approach from the perspective of statistics and economics. In addition, the new constraint approach can effectively defeat CT constraint and CDA strategy. The three mixed models we proposed can further enhance the accuracy of prediction, especially the mixed model combined with our constraint approach. Finally, utilizing our new constraint approach can help investors obtain considerable economic gains. With the application of extension and robustness analysis, our results are robust.
doi_str_mv 10.1155/2021/9911986
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subjects Constraint modelling
Economic analysis
Investments
Model accuracy
Outliers (statistics)
Performance prediction
Portfolio performance
Risk aversion
Variables
title Predicting Stock Return with Economic Constraint: Can Interquartile Range Truncate the Outliers?
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