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Wharton

Department of Statistics

5

Predicting the Market: Specifics

Build a regression model

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Response is return on the value-weighted S&P

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Use standard forward/backward stepwise

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Battery of 12 predictors with interactions

Train the model during 1992-1996  (training data)

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Model captures most of variation in 5 years of returns

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Retain only the most significant features (Bonferroni)

Predict returns in 1997  (validation data)

Another version in Foster, Stine & Waterman

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