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Predictability in international asset returns : a re-examination
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Neely, Christopher J. and Weller, Paul A. (1999) Predictability in international asset returns : a re-examination. Working Paper. University of Warwick: Warwick Business School Financial Econometrics Research Centre. Working Papers Series, Vol.1999 (No.3).
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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
Abstract
This paper argues that inferring long-horizon asset-return predictability from the
properties of vector autoregressive (VAR) models on relatively short spans of data is potentially
unreliable. We illustrate the problems that can arise by re-examining the findings of Bekaert and
Hodrick (1992), who detected evidence of in-sample predictability in international equity and
foreign exchange markets using VAR methodology for a variety of countries over the period
1981-1989. The VAR predictions are significantly biased in most out-of-sample forecasts and
are conclusively outperformed by a simple benchmark model at horizons of up to six months.
This remains true even after corrections for small sample bias and the introduction of Bayesian
parameter restrictions. A Monte Carlo analysis indicates that the data are unlikely to have been
generated by a stable VAR. This conclusion is supported by an examination of structural break
statistics. Implied long-horizon statistics calculated from the VAR parameter estimates are
shown to be very unreliable.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HG Finance Q Science > QA Mathematics |
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Divisions: | Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Assets (Accounting), Corporations -- Valuation -- Forecasting, Autoregression (Statistics) | ||||
Series Name: | Working Papers Series | ||||
Publisher: | Warwick Business School Financial Econometrics Research Centre | ||||
Place of Publication: | University of Warwick | ||||
Official Date: | 19 February 1999 | ||||
Dates: |
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Volume: | Vol.1999 | ||||
Number: | No.3 | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) |
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