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Comparing the market risk premia forecasts in JSE and NYSE equity markets

Author

Listed:
  • Leoni Eleni Oikonomikou

    (Georg-August University Göttingen)

Abstract
This paper examines the evidence regarding predictability in the market risk premium using artificial neural networks (ANNs), namely the Elman Network (EN) and the Higher Order Neural network (HONN), univariate ARMA and exponential smoothing techniques, such as Single Exponential Smoothing (SES) and Exponentially Weighted Moving Average (EWMA). The contribution of this paper is the inclusion of the South African market risk premium to the forecasting exercise and its direct comparison with US forecasting results. The market risk premium is defined as the expected rate of return on the market portfolio in excess of the shortterm interest rate for each market. All data are taken from January 2007 till December 2014 on a daily basis. Elman networks provide superior results among the tested models in both insample and out-of sample periods as well as among the tested markets. In general, neural networks beat the naive benchmark model and achieve to perform better than the rest of their linear tested counterparts. The forecasting models successfully capture patterns in the data that improve the forecasting accuracy of the tested models. Therefore, they can be applied to trading and investment purposes.

Suggested Citation

  • Leoni Eleni Oikonomikou, 2016. "Comparing the market risk premia forecasts in JSE and NYSE equity markets," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 203, Courant Research Centre PEG.
    • Handle: RePEc:got:gotcrc:203
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    File URL: http://www2.vwl.wiso.uni-goettingen.de/courant-papers/CRC-PEG_DP_203.pdf
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    More about this item

    Keywords

    forecasting performance; market risk premium; South African stock market; US stock market;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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