Munich Personal RePEc Archive

Economic and Financial Crises and the Predictability of U.S. Stock Returns

Hartmann, Daniel and Kempa, Bernd and Pierdzioch, Christian (2006): Economic and Financial Crises and the Predictability of U.S. Stock Returns.

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Abstract

We argue that the use of publicly available and easily accessible information on economic and financial crises to detect structural breaks in the link between stock returns and macroeconomic predictor variables improves the performance of simple trading rules in real time. In particular, our results suggest that accounting for structural breaks and regime shifts in forecasting regressions caused by economic and financial crises has the potential to increase the out-of-sample predictability of stock returns, the performance of simple trading rules, and the market-timing ability of an investor trading in the U.S. stock market.

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