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Forecasting multivariate time series under present-value-model short- and long-run co-movement restrictions

  • Guillen, Osmani Teixeira Carvalho
  • Hecq, Alain
  • Issler, João Victor
  • Saraiva, Diogo Vinícius Menezes

It is well known that cointegration between the level of two variables (e.g. prices and dividends) is a necessary condition to assess the empirical validity of a present-value model (PVM) linking them. The work on cointegration,namelyon long-run co-movements, has been so prevalent that it is often over-looked that another necessary condition for the PVM to hold is that the forecast error entailed by the model is orthogonal to the past. This amounts to investigate whether short-run co-movememts steming from common cyclical feature restrictions are also present in such a system. In this paper we test for the presence of such co-movement on long- and short-term interest rates and on price and dividend for the U.S. economy. We focuss on the potential improvement in forecasting accuracies when imposing those two types of restrictions coming from economic theory.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 742.

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Date of creation: 01 Jul 2013
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Handle: RePEc:fgv:epgewp:742
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