The Keys of Predictability: A Comprehensive Study

The problem of market predictability can be decomposed into two parts: predictive models and predictors. At first, we show how the joint employment of model selection and machine learning models can dramatically increase our capability to forecast the equity premium out-of-sample. Secondly, we introduce batteries of powerful predictors which brings the monthly S&P500 R-square to a high level of 24%. Finally, we prove how predictability is a generalized characteristic of U.S. equity markets. For each of the three parts, we consider potential and challenges posed by the new approaches in the asset pricing field.