Autoren: Nusret Cakici (Fordham University), Christian Fieberg (HSB Hochschule Bremen), Tobias Neumaier (Universität Bremen), Thorsten Poddig (Universität Bremen), Adam Zaremba (Montpellier Business School)

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.

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4710577