Long Memory and the Term Structure of Risk
AbstractThis paper explores the implications of asset return predictability for long-term portfolio choice when return-forecasting variables are fractionally integrated. For important predictor variables, like the dividend-price ratio, and nominal and real interest rates, we estimate orders of integration around 0.8. This leads to substantial increases of the estimated long-term risk of stocks, bonds, and cash compared to estimates obtained from a stationary VAR. Results are sensitive to the inclusion of the short-term nominal interest rate in the prediction equation of excess stock returns. Jointly with the dividend-price ratio it has significant predictive power, but contrary to the dividend-price ratio the nominal interest rate does not induce mitigating effects through mean reversion. Copyright The Author 2008. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: firstname.lastname@example.org., Oxford University Press.
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Bibliographic InfoArticle provided by Society for Financial Econometrics in its journal Journal of Financial Econometrics.
Volume (Year): 6 (2008)
Issue (Month): 4 (Fall)
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Other versions of this item:
- Schotman, Peter & Tschernig, Rolf & Budek, Jan, 2008. "Long Memory and the Term Structure of Risk," University of Regensburg Working Papers in Business, Economics and Management Information Systems 427, University of Regensburg, Department of Economics.
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
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- Daniela Osterrieder, 2013. "Interest Rates with Long Memory: A Generalized Affine Term-Structure Model," CREATES Research Papers 2013-17, School of Economics and Management, University of Aarhus.
- Lubos Pastor & Robert F. Stambaugh, 2009.
"Are Stocks Really Less Volatile in the Long Run?,"
NBER Working Papers
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Faculty Working Papers
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- Gil-Alana, Luis A. & Moreno, Antonio, 2012. "Uncovering the US term premium: An alternative route," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1181-1193.
- Tschernig, Rolf & Weber, Enzo & Weigand, Roland, 2014.
"Long- versus medium-run identification in fractionally integrated VAR models,"
University of Regensburg Working Papers in Business, Economics and Management Information Systems
122, University of Regensburg, Department of Economics.
- Tschernig, Rolf & Weber, Enzo & Weigand, Roland, 2014. "Long- versus medium-run identification in fractionally integrated VAR models," Economics Letters, Elsevier, vol. 122(2), pages 299-302.
- Tschernig, Rolf & Weber, Enzo & Weigand, Roland, 2013. "Long- versus medium-run identification in fractionally integrated VAR models," University of Regensburg Working Papers in Business, Economics and Management Information Systems 476, University of Regensburg, Department of Economics.
- Carlo A. Favero & Andrea Tamoni, 2010. "Demographics and the Econometrics of the Term Structure of Stock Market Risk," Working Papers 367, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Daniela Osterrieder & Peter C. Schotman, 2012. "The Volatility of Long-term Bond Returns: Persistent Interest Shocks and Time-varying Risk Premiums," CREATES Research Papers 2012-35, School of Economics and Management, University of Aarhus.
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