Pockets of Predictability:  A Replication

Cakici, Nusret; Fieberg, Christian; Neumaier, Tobias; Poddig, Thorsten; Zaremba, Adam

Pockets of Predictability: A Replication

Abstract

Farmer, Schmidt, and Timmermann (FST) document time-variation in market return predictability, identifying “pockets” of significant predictability through kernel regressions. However, our analysis reveals a critical discrepancy between the method outlined by FST and the code actually implemented. Instead of using a one-sided kernel, which guarantees out-of-sample forecasts, they perform in-sample estimation with a two-sided kernel. As a result, future information leaks into the forecasting model, undermining its reliability. Rectifying this error qualitatively alters the findings, invalidating most conclusions of the FST study. Thus, attempts to exploit such “pockets”—should they genuinely exist—offer little help in forecasting market returns.

Keywords

return predictability stock market time-varying expected returns out-of-sample forecasts kernel regression market timing

Citation

Cakici, Nusret and Fieberg, Christian and Neumaier, Tobias and Poddig, Thorsten and Zaremba, Adam, Pockets of Predictability: A Replication (January 30, 2024). Journal of Finance, Forthcoming

URI

https://open.icm.edu.pl/handle/123456789/25490

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