New study shows macroeconomic factors predict stock returns and volatility accurately.
Factors from macroeconomic data can help predict US stock returns and volatility from 1980-2005. Models using these factors outperform ones with just valuation ratios and interest rates. These models are better at timing the market and predicting volatility. Investors would pay a premium for these more accurate predictions. The stability of the forecasts is a key reason for their success, unlike other models that struggled in the 1990s.