Non-linear forecasts of stock returns
Following recent non-linear extensions of the present-value model, this paper examines the out-of-sample forecast performance of two parametric and two non-parametric nonlinear models of stock returns. The parametric models include the standard regime switching and the Markov regime switching, whereas the non-parametric are the nearest-neighbour and the artificial neural network models. We focused on the US stock market using annual observations spanning the period 1872-1999. Evaluation of forecasts was based on two criteria, namely forecast accuracy and forecast encompassing. In terms of accuracy, the Markov and the artificial neural network models produce at least as accurate forecasts as the other models. In terms of encompassing, the Markov model outperforms all the others. Overall, both criteria suggest that the Markov regime switching model is the most preferable non-linear empirical extension of the present-value model for out-of-sample stock return forecasting. Copyright © 2003 John Wiley & Sons, Ltd.
Volume (Year): 22 (2003)
Issue (Month): 4 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/2966|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hiemstra, Ypke, 1996. "Linear Regression versus Backpropagation Networks to Predict Quarterly Stock Market Excess Returns," Computational Economics, Society for Computational Economics, vol. 9(1), pages 67-76, February.
- Froot, Kenneth A & Obstfeld, Maurice, 1991.
"Intrinsic Bubbles: The Case of Stock Prices,"
American Economic Review,
American Economic Association, vol. 81(5), pages 1189-214, December.
- Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
- Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992.
"Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?,"
Journal of Econometrics,
Elsevier, vol. 54(1-3), pages 159-178.
- Kwiatkowski, D. & Phillips, P.C.B. & Schmidt, P., 1990. "Testing the Null Hypothesis of Stationarity Against the Alternative of Unit Root : How Sure are we that Economic Time Series have a Unit Root?," Papers 8905, Michigan State - Econometrics and Economic Theory.
- Denis Kwiatkowski & Peter C.B. Phillips & Peter Schmidt, 1991. "Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root: How Sure Are We That Economic Time Series Have a Unit Root?," Cowles Foundation Discussion Papers 979, Cowles Foundation for Research in Economics, Yale University.
- Kanas, Angelos & Yannopoulos, Andreas, 2001. "Comparing linear and nonlinear forecasts for stock returns," International Review of Economics & Finance, Elsevier, vol. 10(4), pages 383-398, December.
- Cecchetti, Stephen G & Lam, Pok-sang & Mark, Nelson C, 1990.
"Mean Reversion in Equilibrium Asset Prices,"
American Economic Review,
American Economic Association, vol. 80(3), pages 398-418, June.
- Wang, Jiang & Grossman, Sanford & Campbell, John, 1993.
"Trading Volume and Serial Correlation in Stock Returns,"
3128710, Harvard University Department of Economics.
- John Y. Campbell & Sanford J. Grossman & Jiang Wang, 1992. "Trading Volume and Serial Correlation in Stock Returns," NBER Working Papers 4193, National Bureau of Economic Research, Inc.
- Cutler, David M & Poterba, James M & Summers, Lawrence H, 1991.
Review of Economic Studies,
Wiley Blackwell, vol. 58(3), pages 529-46, May.
- Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics," Working papers 544, Massachusetts Institute of Technology (MIT), Department of Economics.
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1990. "Speculative Dynamics," NBER Working Papers 3242, National Bureau of Economic Research, Inc.
- Clements, M.P. & Franses, Ph.H.B.F. & Smith, J., 1999.
"On SETAR non- linearity and forecasting,"
Econometric Institute Research Papers
EI 9914-/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
- Donaldson, R. Glen & Kamstra, Mark, 1997. "An artificial neural network-GARCH model for international stock return volatility," Journal of Empirical Finance, Elsevier, vol. 4(1), pages 17-46, January.
- Bajo-Rubio, Oscar & Sosvilla-Rivero, Simon & Fernandez-Rodriguez, Fernando, 2001.
"Asymmetry in the EMS: New evidence based on non-linear forecasts,"
European Economic Review,
Elsevier, vol. 45(3), pages 451-473, March.
- Óscar Bajo Rubio & Simón Sosvilla Rivero & Fernando Fernández Rodríguez, 2000. "Asymmetry In The Ems: New Evidence Based On Non-Linear Forecasts," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0001, Departamento de Economía - Universidad Pública de Navarra.
- Diebold, Francis X & Mariano, Roberto S, 1995.
"Comparing Predictive Accuracy,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 13(3), pages 253-63, July.
- Francis X. Diebold & Robert S. Mariano, 1994. "Comparing Predictive Accuracy," NBER Technical Working Papers 0169, National Bureau of Economic Research, Inc.
- Tom Doan, . "DMARIANO: RATS procedure to compute Diebold-Mariano Forecast Comparison Test," Statistical Software Components RTS00055, Boston College Department of Economics.
- Clements,Michael & Hendry,David, 1998.
"Forecasting Economic Time Series,"
Cambridge University Press, number 9780521632423, October.
- Fernandez-Rodriguez, Fernando & Sosvilla-Rivero, Simon & Andrada-Felix, Julian, 1999. "Exchange-rate forecasts with simultaneous nearest-neighbour methods: evidence from the EMS," International Journal of Forecasting, Elsevier, vol. 15(4), pages 383-392, October.
- John Y. Campbell & Robert J. Shiller, 1986.
"The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,"
NBER Working Papers
2100, National Bureau of Economic Research, Inc.
- John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
- Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
- Campbell, John Y. & Lo, Andrew W. & MacKinlay, A. Craig & Whitelaw, Robert F., 1998. "The Econometrics Of Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 2(04), pages 559-562, December.
- Nobuhiro Kiyotaki, 1990. "Learning and the Value of the Firm," NBER Working Papers 3480, National Bureau of Economic Research, Inc.
- Diebold, Francis X. & Nason, James A., 1990.
"Nonparametric exchange rate prediction?,"
Journal of International Economics,
Elsevier, vol. 28(3-4), pages 315-332, May.
- Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
- Kiyotaki, N., 1990. "Learning And The Value Of The Firm," Working papers 90-16, Wisconsin Madison - Social Systems.
- Mizrach, B, 1992. "Multivariate Nearest-Neighbor Forecasts of EMS Exchange Rates," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(S), pages S151-63, Suppl. De.
- Garcia, Rene, 1998.
"Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 763-88, August.
- René Garcia, 1995. "Asymptotic Null Distribution of the Likelihood Ratio Test in Markov Switching Models," CIRANO Working Papers 95s-07, CIRANO.
- Hamilton, James D., 1996. "Specification testing in Markov-switching time-series models," Journal of Econometrics, Elsevier, vol. 70(1), pages 127-157, January.
- Swanson, Norman R & White, Halbert, 1995. "A Model-Selection Approach to Assessing the Information in the Term Structure Using Linear Models and Artificial Neural Networks," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 265-75, July.
- Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
- Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
- Haefke, Christian & Helmenstein, Christian, 1995. "Forecasting Austrian IPOs: An Application of Linear and Neural Network Error-Correction Models," Economics Series 18, Institute for Advanced Studies.
- Driffill, John & Sola, Martin, 1998. "Intrinsic bubbles and regime-switching," Journal of Monetary Economics, Elsevier, vol. 42(2), pages 357-373, July.
When requesting a correction, please mention this item's handle: RePEc:jof:jforec:v:22:y:2003:i:4:p:299-315. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.