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Out-of-sample equity premium prediction: A complete subset quantile regression approach
1 : University of Athens
2 : Kent Business School
(KBS)
4 : University of Essex
* : Corresponding author
Wivenhoe Park Colchester CO4 3SQ -
United Kingdom
This paper extends the complete subset linear regression framework to a quantile regression setting. We employ complete subset combinations of quantile forecasts in order to construct robust and accurate equity premium predictions. Our recursive algorithm that selects, in real time, the best complete subset for each predictive regression quantile succeeds in identifying the best subset in a time- and quantile-varying manner. We show that our approach delivers statistically and economically signi ficant out-of-sample forecasts relative to both the historical average benchmark and the complete subset mean regression approach.
