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Short-term exuberance and long-term stability: A simultaneous optimization of stock return predictions for short and long horizons

Kyriakou, I. ORCID: 0000-0001-9592-596X, Mousavi, P., Nielsen, J. P. ORCID: 0000-0002-2798-0817 and Scholz, M. (2021). Short-term exuberance and long-term stability: A simultaneous optimization of stock return predictions for short and long horizons. Mathematics, 9(6), 620.. doi: 10.3390/math9060620

Abstract

The fundamental interest of investors in econometric modeling for excess stock returns usually focuses either on short- or long-term predictions to individually reduce the investment risk. In this paper, we present a new and simple model that contemporaneously accounts for short- and long-term predictions. By combining the different horizons, we exploit the lower long-term variance to further reduce the short-term variance, which is susceptible to speculative exuberance. As a consequence, the long-term pension-saver avoids an over-conservative portfolio with implied potential upside reductions given their optimal risk appetite. Different combinations of short and long horizons as well as definitions of excess returns, for example, concerning the traditional short-term interest rate but also the inflation, are easily accommodated in our model.

Publication Type: Article
Additional Information: This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Publisher Keywords: finance; investment analysis; stock returns; cross-validation; variation reduction
Subjects: H Social Sciences > HF Commerce
H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Departments: Business School > Actuarial Science & Insurance
Date available in CRO: 17 Mar 2021 10:17
Date deposited: 17 March 2021
Date of acceptance: 11 March 2021
Date of first online publication: 15 March 2021
URI: https://openaccess.city.ac.uk/id/eprint/25806
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