Exploiting price misalignements
Signi�cant cumulative above the market returns can be made by diversifying wealth between equity and bond assets over time. The main premise of the trading rule model is to identify when should assets be held in the bond and equity markets in real time. The model involves comparing the net present value of the equity index with the actual price. Recursive and Rolling forecasts of dividends from three regression schemes are used to proxy expected dividends. The returns are sensitive to the forecasting model and the discount factor adopted in the net present value relation.
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