Predictive regressions with time-varying coefficients
2012; Elsevier BV; Volume: 106; Issue: 1 Linguagem: Inglês
10.1016/j.jfineco.2012.04.003
ISSN1879-2774
AutoresThomas Dangl, Michael Halling,
Tópico(s)Market Dynamics and Volatility
ResumoWe evaluate predictive regressions that explicitly consider the time-variation of coefficients in a comprehensive Bayesian framework. For monthly returns of the S&P 500 index, we demonstrate statistical as well as economic evidence of out-of-sample predictability: relative to an investor using the historic mean, an investor using our methodology could have earned consistently positive utility gains (between 1.8% and 5.8% per year over different time periods). We also find that predictive models with constant coefficients are dominated by models with time-varying coefficients. Finally, we show a strong link between out-of-sample predictability and the business cycle.
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