TY - JOUR T1 - Regime Shifts in Excess Stock Return Predictability: <em>An Out-of-Sample Portfolio Analysis</em> JF - The Journal of Portfolio Management SP - 10 LP - 24 DO - 10.3905/jpm.2018.2018.1.077 VL - 44 IS - 3 AU - Giulia Dal Pra AU - Massimo Guidolin AU - Manuela Pedio AU - Fabiola Vasile Y1 - 2018/01/31 UR - https://pm-research.com/content/44/3/10.abstract N2 - The authors analyze the out-of-sample performance of asset allocation decisions based on financial ratio predictability of aggregate stock market returns under linear and regime-switching models. The authors adopt both a statistical perspective to analyze whether models based on valuation ratios can forecast excess equity returns, and an economic approach that turns predictions into portfolio strategies. These consist of a portfolio switching approach, a mean-variance framework, and a long-run dynamic model. The authors find a disconnect between the statistical perspective, whereby the ratios yield a modest forecasting power, and a portfolio approach, by which a moderate predictability is often sufficient to yield significant portfolio outperformance, especially before transaction costs and when regimes are taken into account. However, also when regimes are considered, predictability gives high payoffs only to long horizon, highly risk-averse investors. Moreover, different strategies deliver different performance rankings across predictors.TOPICS: Analysis of individual factors/risk premia, in markets, portfolio theory ER -