Predictability in international asset returns : a re-examination
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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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|
|Official Date:||19 February 1999|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
Andrews, Donald W. K., “Tests for Parameter Instability and Structural Change with Unknown
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