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Does the Level of Swedish Economic Policy Uncertainty Help Forecast Excess Returns on the Swedish Stock Market?Jacobsson, Gustav, Klersell, Oscar January 2023 (has links)
This thesis examines whether the level of Swedish economic policy uncertainty (EPU) can predict excess returns on the Swedish stock market. We run out-of-sample forecasting using an EPU-based predictive model constructed with the official Swedish EPU index developed by Armelius et al. (2017). Forecasting errors for one-, two-, three-, six-, and twelve-month holding periods and four measures of central tendency are analysed and compared against a random walk benchmark. The findings suggest that EPU has limited forecasting ability for excess stock returns in Sweden, and the EPU-based model demonstrates superior forecasting accuracy only in two out of twenty instances, both for the one-month holding period. However, the forecast errors remain relatively large, casting doubt on the model's ability to outperform the market. Furthermore, the EPU-based model consistently underestimates excess returns, questioning its usefulness as a predictor. Notably, the random walk benchmark's forecast error improves with longer holding periods, raising doubts about the predictability of market movements in the long term.
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