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Kelly & Pruitt use a "3-pass regression filter" to predict stock market returns by looking at time series of prices of many individual stocks, claiming far better out-of-sample predictive validity than using other measures. I think their paper uses book to market ratios and economic variables as predictors but they actually find that using a time series of numerous stock prices works even better. The real finding is the method -- the 3-pass regression filter -- that aggregates the data.
Here is a summary of their findings; the regression model is on a slide about a third of the way in titled "Partial Least Squares"
The more detailed papers are here:
...the "Market Expectations" paper and the "3-Pass" paper.
I am interested in being able to use this metric in my tactical asset allocation model. I know how to do "Pass 1" -- regressing individual stock returns on future va...
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