Abstract
- I measure the predictable component in global equity excess returns with a time-varying specification and with additional bond market related predictors. These more flexible specifications improve the model fit of the data but do not overcome its inherent fragility for out-of-sample forecasting, although including bond market anticipation effects increases the degree of variability explained by the predictor variables along time-series and cross-sectional dimensions. Considered in light of Mang (2014) for currency markets, there is mounting evidence that expectation effects originating in bond markets partially cause excess volatility in global financial markets.
JEL Classification: G15, G17, G18
Keywords: excess volatility; global equity markets; return predictability; time-varying risk