RT Journal Article SR Electronic T1 Regime Shifts in Excess Stock Return Predictability: An Out-of-Sample Portfolio Analysis JF The Journal of Portfolio Management FD Institutional Investor Journals SP jpm.2018.1.077 DO 10.3905/jpm.2018.2018.1.077 A1 Giulia Dal Pra A1 Massimo Guidolin A1 Manuela Pedio A1 Fabiola Vasile YR 2018 UL https://pm-research.com/content/early/2018/01/01/jpm.2018.2018.1.077.abstract AB The authors analyze the out-of-sample performance of asset allocation decisions based on financial ratio predictability of aggregate stock market returns under linear and regime-switching models. The authors adopt both a statistical perspective to analyze whether models based on valuation ratios can forecast excess equity returns, and an economic approach that turns predictions into portfolio strategies. These consist of a portfolio switching approach, a mean-variance framework, and a long-run dynamic model. The authors find a disconnect between the statistical perspective, whereby the ratios yield a modest forecasting power, and a portfolio approach, by which a moderate predictability is often sufficient to yield significant portfolio outperformance, especially before transaction costs and when regimes are taken into account. However, also when regimes are considered, predictability gives high payoffs only to long horizon, highly risk-averse investors. Moreover, different strategies deliver different performance rankings across predictors.