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Predictive regressions with time-varying coefficients

Listed author(s):
  • Dangl, Thomas
  • Halling, Michael
Registered author(s):

    We evaluate predictive regressions that explicitly consider the time-variation of coefficients in a comprehensive Bayesian framework. For monthly returns of the S&P 500 index, we demonstrate statistical as well as economic evidence of out-of-sample predictability: relative to an investor using the historic mean, an investor using our methodology could have earned consistently positive utility gains (between 1.8% and 5.8% per year over different time periods). We also find that predictive models with constant coefficients are dominated by models with time-varying coefficients. Finally, we show a strong link between out-of-sample predictability and the business cycle.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12000633
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 1 ()
    Pages: 157-181

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:1:p:157-181
    DOI: 10.1016/j.jfineco.2012.04.003
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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