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Prediction of Stock Returns: Sum-of-the-Parts Method and Economic Constraint Method

College of Mathematics and Statistics, Changsha University of Science and Technology, Changsha 410114, Hunan, China
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Sustainability 2020, 12(2), 541; https://doi.org/10.3390/su12020541
Received: 29 November 2019 / Revised: 8 January 2020 / Accepted: 8 January 2020 / Published: 10 January 2020
(This article belongs to the Special Issue Forecasting Financial Markets and Financial Crisis)
Forecasting stock market returns has great significance to asset allocation, risk management, and asset pricing, but stock return prediction is notoriously difficult. In this paper, we combine the sum-of-the-parts (SOP) method and three kinds of economic constraint methods: non-negative economic constraint strategy, momentum of return prediction strategy, and three-sigma strategy to improve prediction performance of stock returns, in which the price-earnings ratio growth rate (gm) is predicted by economic constraint methods. Empirical results suggest that the stock return forecasts by proposed models are both statistically and economically significant. The predictions of proposed models are robust to various robustness tests. View Full-Text
Keywords: SOP method; economic constraint method; stock return predictability; out-of-sample forecast; asset allocation SOP method; economic constraint method; stock return predictability; out-of-sample forecast; asset allocation
MDPI and ACS Style

Dai, Z.; Zhou, H. Prediction of Stock Returns: Sum-of-the-Parts Method and Economic Constraint Method. Sustainability 2020, 12, 541. https://doi.org/10.3390/su12020541

AMA Style

Dai Z, Zhou H. Prediction of Stock Returns: Sum-of-the-Parts Method and Economic Constraint Method. Sustainability. 2020; 12(2):541. https://doi.org/10.3390/su12020541

Chicago/Turabian Style

Dai, Zhifeng; Zhou, Huiting. 2020. "Prediction of Stock Returns: Sum-of-the-Parts Method and Economic Constraint Method" Sustainability 12, no. 2: 541. https://doi.org/10.3390/su12020541

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