Stock and Bond Return Predictability : The Discrimination Power of Model Selection Criteria
We analyze the discrimination power of well-known model selection criteria when R2 is low as in typical asset return predictability studies. We find that the discrimination power is low in this setup and in particular give another interpretation to the well-cited Bossaerts and Hillion (1999) study. We then look at model selection criteria in a testing framework and propose, as a diagnostic tool, a bootstrap based procedure to construct the class of models which are statistically undistinguishable from the best model chosen by a model selection criterion. As an empirical illustration we reanalyze the Pesaran and Timmerman (1995) results and show that the class of undistiguishable models can be large. Finally we show that the similar problems arise in a more hidden way in the context of recent model uncertainty studies such as the Bayesian model selection criteria proposed by Avramov (2002) and Cremers (2002).
|Date of creation:||Jun 2004|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +41 22 379 8263
Fax: +41 22 379 82 93
Web page: http://www.unige.ch/gsem/dsec/index.html
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.:
- Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992.
" Simple Technical Trading Rules and the Stochastic Properties of Stock Returns,"
Journal of Finance,
American Finance Association, vol. 47(5), pages 1731-64, December.
- Brock, W. & Lakonishok, J. & Lebaron, B., 1991. "Simple Technical Trading Rules And The Stochastic Properties Of Stock Returns," Working papers 90-22, Wisconsin Madison - Social Systems.
- David F. Hendry & Michael P. Clements, 2004.
"Pooling of forecasts,"
Royal Economic Society, vol. 7(1), pages 1-31, 06.
- David Hendry & Michael Clements, 2001. "Pooling of Forecasts," Economics Series Working Papers 2002-W09, University of Oxford, Department of Economics.
- David Hendry & Michael P. Clements, 2001. "Pooling of Forecasts," Economics Papers 2002-W9, Economics Group, Nuffield College, University of Oxford.
- Granger, Clive W. J. & Jeon, Yongil, 2004. "Thick modeling," Economic Modelling, Elsevier, vol. 21(2), pages 323-343, March.
- Pesaran, M. H. & Timmermann, A., 1996.
"A Recursive Modelling Approach to Predicting UK Stock Returns',"
Cambridge Working Papers in Economics
9625, Faculty of Economics, University of Cambridge.
- Pesaran, M Hashem & Timmermann, Allan, 2000. "A Recursive Modelling Approach to Predicting UK Stock Returns," Economic Journal, Royal Economic Society, vol. 110(460), pages 159-91, January.
- Allan Timmermann & M. Hashem Pesaran, 1999. "A Recursive Modelling Approach to Predicting UK Stock Returns," FMG Discussion Papers dp322, Financial Markets Group.
- Christoffersen, Peter F & Diebold, Francis X, 1996.
"Further Results on Forecasting and Model Selection under Asymmetric Loss,"
Journal of Applied Econometrics,
John Wiley & Sons, Ltd., vol. 11(5), pages 561-71, Sept.-Oct.
- Christoffersen & Diebold, . "Further Results on Forecasting and Model Selection Under Asymmetric Loss," Home Pages _059, University of Pennsylvania.
- Campbell, John, 1987.
"Stock Returns and the Term Structure,"
3207699, Harvard University Department of Economics.
- 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.
- Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
- 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.
- Carlo A. Favero & Marco Aiolfi & Giorgio Primiceri, . "Recursive `thick´ modeling of excess returns and portfolio allocation," Working Papers 197, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
- Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
- 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.
- 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.
- Pesaran, M. H. & Weeks, M., 1999. "Non-nested Hypothesis Testing: An Overview," Cambridge Working Papers in Economics 9918, Faculty of Economics, University of Cambridge.
- Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
- Granger, C.W.J. & Pesaran, H., 1996. "A Decision_Theoretic Approach to Forecast Evaluation," Cambridge Working Papers in Economics 9618, Faculty of Economics, University of Cambridge.
- K. J. Martijn Cremers, 2002. "Stock Return Predictability: A Bayesian Model Selection Perspective," Review of Financial Studies, Society for Financial Studies, vol. 15(4), pages 1223-1249.
When requesting a correction, please mention this item's handle: RePEc:gen:geneem:2004.05. 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: ()
If references are entirely missing, you can add them using this form.