Stepwise Regression to Predict Market Performance in the Janet Yellen Era

Abstract

This paper adds to research on the effect of past interest rates on current market performance; specifically, this papers attempts to determine if a model can be developed to predict market performance based on historical interest rates. This research utilizes data from two different time periods to construct two different models, and each model is tested to determine its predictive ability during the time period when Janet Yellen was Chair of the Board of Governors of the Federal Reserve System. This research finds that models with strong predictive ability can be developed within time periods, but due to issues of non-stationarity and overfitting, those models become much weaker when applied to a different time period. Future research is necessary to create more successful models, and that future research needs to involve rigorous analysis of specific time periods to avoid problems with non-stationarity, and that research needs to utilize a number of data analysis techniques to avoid problems with overfitting.