Time-varying stock return predictability: the Eurozone case

Abstract

In this paper, we test the existence of predictability in eleven Eurozone stock markets, using both regressions with constant coefficients and with time-varying coefficients. Our results show that there is statistical evidence of predictability in some countries. The economic value of the forecasting models is much stronger than what could be inferred, based on the statistical tests. A meanvariance investor could have obtained substantial utility gains in most countries. Overall, models with time-varying parameters perform slightly better than models with constant coefficients.http://dx.doi.org/10.14195/2183‑203X_41_4