Best Model of Future Stock Market Returns?

Which variables deserve greatest focus when predicting stock market returns? In their July 2022 paper entitled “Searching for the Best Conditional Equity Premium Model”, Hui Guo, Saidat Sanni and Yan Yu exhaustively explore combinations of 18 previously identified potential stock market return predictors to isolate the most powerful subset. They focus on a best subset selection method with a penalty on complexity, thereby suppressing data snooping bias and selecting a manageable subset. For robustness, they consider four alternative variable selection methods. Using quarterly U.S. data for these 18 variables and S&P 500 Index levels/returns during 1947 through 2020, they find that: (more…)