Predicting German Stock and Bond Returns with Macro-Variables: Evidence of Market Timing

Abstract

We investigate the predictive ability of financial and macroeconomic variables for German stock and bond returns using a battery of performance metrics in addition to measures of superior predictive accuracy to identify the ‘best’ models. We also examine whether combination forecasts provide still better performance. The market timing ability of the best models is compared to simpler models and a naive buy and hold strategy. Changes in oil prices, industrial production growth and changes in short term interest rates are key predicators for stock returns. Additionally, for bond returns, exchanges rates and inflation play a role. We uncover clear evidence of the market timing ability of trading strategies based upon our best predictive models.