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Does the macroeconomy predict U.K. asset returns in a nonlinear fashion? comprehensive out-of-sample evidence

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Author Info

  • Massimo Guidolin
  • Stuart Hyde
  • David McMillan
  • Sadayuki Ono

Abstract

We perform a comprehensive examination of the recursive, comparative predictive performance of a number of linear and non-linear models for UK stock and bond returns. We estimate Markov switching, threshold autoregressive (TAR), and smooth transition autoregressive (STR) regime switching models, and a range of linear specifications in addition to univariate models in which conditional heteroskedasticity is captured by GARCH type specifications and in which predicted volatilities appear in the conditional mean. The results demonstrate that U.K. asset returns require non-linear dynamics be modeled. In particular, the evidence in favor of adopting a Markov switching framework is strong. Our results appear robust to the choice of sample period, changes in the adopted loss function and to the methodology employed to test the null hypothesis of equal predictive accuracy across competing models.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2010-039.

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Date of creation: 2010
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Handle: RePEc:fip:fedlwp:2010-039

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Keywords: Forecasting ; Econometric models ; Rate of return ; Great Britain;

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References

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Cited by:
  1. Rangan Gupta & Shawkat Hammoudeh & Beatrice D. Simo-Kengne & Soodabeh Sarafrazi, 2013. "Can the Sharia-Based Islamic Stock Market Returns be Forecasted Using Large Number of Predictors and Models?," Working Papers 201381, University of Pretoria, Department of Economics.
  2. Marcos Álvarez-Díaz & Shawkat Hammoudeh & Rangan Gupta, 2013. "Detecting Predictable Non-linear Dynamics in Dow Jones Industrial Average and Dow Jones Islamic Market Indices using Nonparametric Regressions," Working Papers 201385, University of Pretoria, Department of Economics.

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