IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Market Timing And Model Uncertainty: An Exploratory Study For The Swiss Stock Market

  • David Rey

    ()

Registered author(s):

    We use statistical model selection criteria and Avramov's (2002) Bayesian model averaging approach to analyze the sample evidence of stock market predictability in the presence of model uncertainty. The empirical analysis for the Swiss stock market is based on a number of predictive variables found important in previous studies of return predictability. We find that it is difficult to discard any predictive variable as completely worthless, but that the posterior probabilities of the individual forecasting models as well as the cumulative posterior probabilities of the predictive variables are time-varying. Moreover, the estimates of the posterior probabilities are not robust to whether the predictive variables are stochastically detrended or not. The decomposition of the variance of predicted future returns into the components parameter uncertainty, model uncertainty, and the uncertainty attributed to forecast errors indicates that the respective contributions strongly depend on the time period under consideration and the initial values of the predictive variables. In contrast to AVRAMOV (2002), model uncertainty is generally not more important than parameter uncertainty. Finally, we demonstrate the implications of model uncertainty for market timing strategies. In general, our results do not indicate any reliable out-of-sample return predictability. Among the predictive variables, the dividend-price ratio exhibits the worst external validation on average. Again in contrast to AVRAMOV (2002), our analysis suggests that the out-of-sample performance of the Bayesian model averaging approach is not superior to the statistical model selection criteria. Consequently, model averaging does not seem to help improve the performance of the resulting short-term market timing strategies. Copyright Swiss Society for Financial Market Research 2005

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://hdl.handle.net/10.1007/s11408-005-4695-z
    Download Restriction: Access to full text is restricted to subscribers.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Springer in its journal Financial Markets and Portfolio Management.

    Volume (Year): 19 (2005)
    Issue (Month): 3 (October)
    Pages: 239-260

    as
    in new window

    Handle: RePEc:kap:fmktpm:v:19:y:2005:i:3:p:239-260
    Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=119763

    References listed on IDEAS
    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.:

    as in new window
    1. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
    2. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    3. Wayne E. Ferson & Sergei Sarkissian & Timothy Simin, 2002. "Spurious Regressions in Financial Economics?," NBER Working Papers 9143, National Bureau of Economic Research, Inc.
    4. Shmuel Kandel & Robert F. Stambaugh, 1995. "On the Predictability of Stock Returns: An Asset-Allocation Perspective," NBER Working Papers 4997, National Bureau of Economic Research, Inc.
    5. John H. Cochrane, 1999. "New Facts in Finance," NBER Working Papers 7169, National Bureau of Economic Research, Inc.
    6. Phillips, Peter C.B. & Ploberger, Werner, 1994. "Posterior Odds Testing for a Unit Root with Data-Based Model Selection," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 774-808, August.
    7. Fair, Ray C & Shiller, Robert J, 1990. "Comparing Information in Forecasts from Econometric Models," American Economic Review, American Economic Association, vol. 80(3), pages 375-89, June.
    8. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02.
    9. Neely, Christopher J. & Weller, Paul, 2000. "Predictability in International Asset Returns: A Reexamination," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 601-620, December.
    10. Bekaert, Geert, 2001. "Editor's foreword to the special issue: "On the predictability of asset returns"," Journal of Empirical Finance, Elsevier, vol. 8(5), pages 451-457, December.
    11. Ferson, Wayne E & Harvey, Campbell R, 1991. "The Variation of Economic Risk Premiums," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 385-415, April.
    12. Owen Lamont, 1998. "Earnings and Expected Returns," Journal of Finance, American Finance Association, vol. 53(5), pages 1563-1587, October.
    13. Campbell, John, 1991. "A Variance Decomposition for Stock Returns," Scholarly Articles 3207695, Harvard University Department of Economics.
    14. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
    15. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-28.
    16. John Y. Campbell & Luis M. Viceira, 1999. "Consumption And Portfolio Decisions When Expected Returns Are Time Varying," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 433-495, May.
    17. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael Roberts, 2004. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," NBER Working Papers 10651, National Bureau of Economic Research, Inc.
    18. Amit Goyal & Pedro Santa-Clara, 2003. "Idiosyncratic Risk Matters!," Journal of Finance, American Finance Association, vol. 58(3), pages 975-1008, 06.
    19. Pontiff, Jeffrey & Schall, Lawrence D., 1998. "Book-to-market ratios as predictors of market returns," Journal of Financial Economics, Elsevier, vol. 49(2), pages 141-160, August.
    20. Schwert, G. William, 2003. "Anomalies and market efficiency," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 15, pages 939-974 Elsevier.
    21. Brennan, Michael J. & Schwartz, Eduardo S. & Lagnado, Ronald, 1997. "Strategic asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1377-1403, June.
    22. Amit Goyal & Ivo Welch, 1999. "Predicting the Equity Premium with Dividend Ratios," Yale School of Management Working Papers amz2437, Yale School of Management, revised 01 Nov 2002.
    23. Foster, F Douglas & Smith, Tom & Whaley, Robert E, 1997. " Assessing Goodness-of-Fit of Asset Pricing Models: The Distribution of the Maximal R-Squared," Journal of Finance, American Finance Association, vol. 52(2), pages 591-607, June.
    24. Charles M. C. Lee & James Myers & Bhaskaran Swaminathan, 1999. "What is the Intrinsic Value of the Dow?," Journal of Finance, American Finance Association, vol. 54(5), pages 1693-1741, October.
    25. Donald B. Keim & Robert F. Stambaugh, . "Predicting Returns in the Stock and Bond Markets," Rodney L. White Center for Financial Research Working Papers 15-85, Wharton School Rodney L. White Center for Financial Research.
    26. Malcolm Baker & Jeffrey Wurgler, 1999. "The Equity Share in New Issues and Aggregate Stock Returns," Yale School of Management Working Papers ysm124, Yale School of Management, revised 01 Jan 2009.
    27. Ivo Welch & Amit Goyal, 2004. "A Note On 'Predicting Returns With Financial Ratios'," Yale School of Management Working Papers amz2465, Yale School of Management.
    28. Walter Torous & Rossen Valkanov & Shu Yan, 2004. "On Predicting Stock Returns with Nearly Integrated Explanatory Variables," The Journal of Business, University of Chicago Press, vol. 77(4), pages 937-966, October.
    29. Ferson, Wayne E & Harvey, Campbell R, 1993. "The Risk and Predictability of International Equity Returns," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 527-66.
    30. Chen, Nai-Fu, 1991. " Financial Investment Opportunities and the Macroeconomy," Journal of Finance, American Finance Association, vol. 46(2), pages 529-54, June.
    31. Yihong Xia, 2001. "Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation," Journal of Finance, American Finance Association, vol. 56(1), pages 205-246, 02.
    32. Valkanov, Rossen, 2003. "Long-horizon regressions: theoretical results and applications," Journal of Financial Economics, Elsevier, vol. 68(2), pages 201-232, May.
    33. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
    34. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    35. Yakov Amihud & Clifford Hurvich, 2004. "Predictive Regressions: A Reduced-Bias Estimation Method," Econometrics 0412008, EconWPA.
    36. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    37. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:kap:fmktpm:v:19:y:2005:i:3:p:239-260. 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: (Guenther Eichhorn)

    or (Christopher F. Baum)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.