Economic Value of Stock and Interest Rate Predictability in the UK
In this paper, we evaluate the forecast performance of a range of atheoretic and theory informed models of bond and stock returns. The decision making environment is fully described for an investor who would like to optimally allocate his portfolio between bonds and stocks, over an investment horizon of up to two years. We use a weekly dataset on UK Treasury Bill rates and the FTSE All-Share Index over the period 1997 to 2007, to examine the impact parameter uncertainty and predictability in returns have on how the investor optimally allocates his portfolio. The methods by which the forecasts should be computed and used in this context are described. Both statistical and decision based criteria are used to evaluate the out-of-sample forecasting performance of the models. Our results suggest that in the context of investment decision making under an economic value criterion, the investor gains from not only assuming predictability but by modelling the bond and stock returns together.
|Date of creation:||Apr 2010|
|Date of revision:|
|Contact details of provider:|| Postal: Department of Economics University of Leicester, University Road. Leicester. LE1 7RH. UK|
Phone: +44 (0)116 252 2887
Fax: +44 (0)116 252 2908
Web page: http://www2.le.ac.uk/departments/economics
More information through EDIRC
|Order Information:|| Web: http://www2.le.ac.uk/departments/economics/research/discussion-papers Email: |
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.:
- Della Corte, Pasquale & Sarno, Lucio & Thornton, Daniel L, 2007.
"The Expectation Hypothesis of the Term Structure of Very Short-Term Rates: Statistical Tests and Economic Value,"
CEPR Discussion Papers
6445, C.E.P.R. Discussion Papers.
- Della Corte, Pasquale & Sarno, Lucio & Thornton, Daniel L., 2008. "The expectation hypothesis of the term structure of very short-term rates: Statistical tests and economic value," Journal of Financial Economics, Elsevier, vol. 89(1), pages 158-174, July.
- Pasquale Della Corte & Lucio Sarno & Daniel L. Thornton, 2007. "The expectation hypothesis of the term structure of very short-term rates: statistical tests and economic value," Working Papers 2006-061, Federal Reserve Bank of St. Louis.
- Giorgio Valente & Daniel Thornton & Lucio Sarno, 2005.
"The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields,"
wp05-13, Warwick Business School, Finance Group.
- Sarno, Lucio & Thornton, Daniel L. & Valente, Giorgio, 2007. "The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(01), pages 81-100, March.
- Lucio Sarno & Daniel L. Thornton & Giorgio Valente, 2005. "The empirical failure of the expectations hypothesis of the term structure of bond yields," Working Papers 2003-021, Federal Reserve Bank of St. Louis.
- Sarno, Lucio & Thornton, Daniel L & Valente, Giorgio, 2005. "The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields," CEPR Discussion Papers 5259, C.E.P.R. Discussion Papers.
When requesting a correction, please mention this item's handle: RePEc:lec:leecon:10/13. 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: (Mrs. Alexandra Mazzuoccolo)
If references are entirely missing, you can add them using this form.