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Exploiting price misalignements

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  • Rambaccussing, Dooruj

Abstract

Signi�cant cumulative above the market returns can be made by diversifying wealth between equity and bond assets over time. The main premise of the trading rule model is to identify when should assets be held in the bond and equity markets in real time. The model involves comparing the net present value of the equity index with the actual price. Recursive and Rolling forecasts of dividends from three regression schemes are used to proxy expected dividends. The returns are sensitive to the forecasting model and the discount factor adopted in the net present value relation.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27147.

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Date of creation: 09 Sep 2009
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Handle: RePEc:pra:mprapa:27147

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Related research

Keywords: Net Present Value; Dividend forecasts; Real-time; Trading Rule; Excess volatility;

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  1. Bulkley, George & Tonks, Ian, 1989. "Are U.K. Stock Prices Excessively Volatile? Trading Rules and Variance Bounds Tests," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 99(398), pages 1083-98, December.
  2. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(3), pages 253-63, July.
  3. Bulkley, George & Taylor, Nick, 1996. "A cross-section test of the present value model," Journal of Empirical Finance, Elsevier, Elsevier, vol. 2(4), pages 295-306, February.
  4. Robert J. Shiller & Andrea E. Beltratti, 1990. "Stock Prices and Bond Yields: Can Their Comovements Be Explained in Terms of Present Value Models?," NBER Working Papers 3464, National Bureau of Economic Research, Inc.
  5. JULES H. van BINSBERGEN & RALPH S. J. KOIJEN, 2010. "Predictive Regressions: A Present-Value Approach," Journal of Finance, American Finance Association, American Finance Association, vol. 65(4), pages 1439-1471, 08.
  6. Bulkley, George & Tonks, Ian, 1992. "Trading Rules and Excess Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 365-382, September.
  7. Granger, Clive & Timmermann, Allan G, 2002. "Efficient Market Hypothesis and Forecasting," CEPR Discussion Papers 3593, C.E.P.R. Discussion Papers.
  8. Sweeney, Richard J, 1986. " Beating the Foreign Exchange Market," Journal of Finance, American Finance Association, American Finance Association, vol. 41(1), pages 163-82, March.
  9. Doron Avramov, 2004. "Stock Return Predictability and Asset Pricing Models," Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 699-738.
  10. Timmermann, Allan, 2008. "Elusive return predictability," International Journal of Forecasting, Elsevier, Elsevier, vol. 24(1), pages 1-18.
  11. Avramov, Doron, 2002. "Stock return predictability and model uncertainty," Journal of Financial Economics, Elsevier, Elsevier, vol. 64(3), pages 423-458, June.
  12. David Rey, 2005. "Market Timing And Model Uncertainty: An Exploratory Study For The Swiss Stock Market," Financial Markets and Portfolio Management, Springer, vol. 19(3), pages 239-260, October.
  13. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 27-59, October.
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