Predicting Stock Return with Economic Constraint: Can Interquartile Range Truncate the Outliers?. (21st June 2021)

• Record Type: Journal Article
• Authors: Dai, Zhifeng; Chang, Xiaoming
• Other Names: de Oliveira Correia José António Fonseca Academic Editor.
• Is Part Of: Mathematical problems in engineering. Volume 2021(2021)
• Publication Date: 2021-06-21
• Subjects: Engineering mathematics -- Periodicals; 510.2462
• DOI: 10.1155/2021/9911986
• Languages: English
• ISSNs: 1024-123X

Abstract

Abstract : 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.