City Research Online

Forecasting benchmarks of long-term stock returns via machine learning

Kyriakou, I. ORCID: 0000-0001-9592-596X, Mousavi, P., Nielsen, J. P. & Scholz, M. (2019). Forecasting benchmarks of long-term stock returns via machine learning. Annals of Operations Research, 297(1-2), pp. 221-240. doi: 10.1007/s10479-019-03338-4


Recent advances in pension product development seem to favour alternatives to the risk free asset often used in the financial theory as a performance standard for measuring the value generated by an investment or a reference point for determining the value of a financial instrument. To this end, in this paper, we apply the simplest machine learning technique, namely, a fully nonparametric smoother with the covariates and the smoothing parameter chosen by cross-validation to forecast stock returns in excess of different benchmarks, including the short-term interest rate, long-term interest rate, earnings-by-price ratio, and the inflation. We find that, net-of-inflation, the combined earnings-by-price and long-short rate spread form our best-performing two-dimensional set of predictors for future annual stock returns. This is a crucial conclusion for actuarial applications that aim to provide real-income forecasts for pensioners.

Publication Type: Article
Additional Information: © The Author(s) 2019. This article is distributed under the terms of the Creative Commons Attribution 4.0 International License (, which permits unrestricted use, distribution, and reproduction in any medium, provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and indicate if changes were made.
Publisher Keywords: Benchmark, Cross-validation, Prediction, Stock returns
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Actuarial Science & Insurance
SWORD Depositor:
[thumbnail of Kyriakou_et_al-2019-Annals_of_Operations_Research.pdf]
Text - Published Version
Available under License Creative Commons Attribution.

Download (359kB) | Preview


Add to AnyAdd to TwitterAdd to FacebookAdd to LinkedinAdd to PinterestAdd to Email


Downloads per month over past year

View more statistics

Actions (login required)

Admin Login Admin Login