1 Department of Economics and Business Economics, Aarhus BSS, Aarhus University2 Department of Economics and Business Economics - Center for Research in Econometric Analysis of Time Series (CREATES), Department of Economics and Business Economics, Aarhus BSS, Aarhus University3 University of California, Riverside4 Pontifical Catholic University of Rio de Janeiro5 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
The literature on excess return prediction has considered a wide array of estimation schemes, among them unrestricted and restricted regression coefficients. We consider bootstrap aggregation (bagging) to smooth parameter restrictions. Two types of restrictions are considered: positivity of the regression coefficient and positivity of the forecast. Bagging constrained estimators can have smaller asymptotic mean-squared prediction errors than forecasts from a restricted model without bagging. Monte Carlo simulations show that forecast gains can be achieved in realistic sample sizes for the stock return problem. In an empirical application using the data set of Campbell and Thompson (2008), we show that we can improve the forecast performance further by smoothing the restriction through bagging.
Essays in Nonlinear Time Series Econometrics, 2014
Constraints on predictive regression function; Bagging; Asymptotic MSE; Equity premium; Out-of-sample forecasting; Economic; Value functions