This paper applies an extended and generalised version of the recursive modelling strategy developed in Persaran and Timmermann (1995) to the UK stock market. The focus of the analysis is to simulate investors search in in real time for a model that can forecast stock returns. It demonstrates...

Despite mounting empirical evidence to the contrary, the literature on predictability of stock returns almost uniformly assumes a time-invariant relationship between state variables and returns. In this paper we propose a two-stage approach for forecasting of financial return series that are...