The Horizon Effect of Stock Return Predictability and Model Uncertainty on Portfolio Choice: UK Evidence
AbstractWe study how stock return's predictability and model uncertainty affect a rational buy-and-hold investor.s decision to allocate her wealth for different lengths of investment horizons in the UK market. We consider the FTSE All-Share Index as the risky asset, and the UK Treasury bill as the risk free asset in forming the investor's portfolio. We identify the most powerful predictors of the stock return by accounting for model uncertainty. We find that though stock return predictability is weak, it can still affect the investor's optimal portfolio decision over different investment horizons.
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Bibliographic InfoPaper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/4.
Length: 44 pages
Date of creation: Mar 2009
Date of revision: Aug 2009
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Web page: http://business.cardiff.ac.uk/research/academic-sections/economics/working-papers
More information through EDIRC
stock return predictability; portfolio choice; Bayesian Model Averaging; SUR model;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-03-28 (All new papers)
- NEP-FMK-2009-03-28 (Financial Markets)
- NEP-UPT-2009-03-28 (Utility Models & Prospect Theory)
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