Neely, Christopher J. and Weller, Paul A. (1999) Predictability in international asset returns : a re-examination. Working Paper. Warwick Business School Financial Econometrics Research Centre, University of Warwick.

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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)
Subjects:	H Social Sciences > HG Finance Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
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
Date:	19 February 1999
Volume:	Vol.1999
Number:	No.3
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/1845

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