In this paper we provide analytical, simulation, and empirical evidence on a test of equal economic value from competing predictive models of asset returns. We define economic value using the concept of a performance fee - the amount an investor would be willing to pay to have access to an alternative predictive model that is used to make investment decisions. We establish that this fee can be asymptotically normal under modest assumptions. Monte Carlo evidence shows that our test can be accurately sized in reasonably large samples. We apply the proposed test to predictions of the US equity premium.
https://doi.org/10.20955/wp.2012.049
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