Modeling the time-varying skewness via decomposition for out-of-sample forecast
This paper models time-varying skewness for financial return dynamics. We decompose nancial returns into the product of the absolute returns and signs, so-called the intriguing decomposition. The joint distribution between the decomposed components is modeled through a copula function with marginals. Allowing the copula dependence parameter time-varying, we estimate the dynamic nonlinear dependence between absolute returns and signs, which governs time- varying skewness for out-of-sample forecast of financial returns. The empirical results in this paper show that the proposed models with dynamic dependence obtain better gains of out-of-sample fore- cast, and suggest the robust strategy for a risk-averse investor in response to the market timing. This paper also explores the sources of the forecasting performance via a recently developed econometric pin-down approach. Beyond the pure statistical sense, we find that the forecasts of time-varying skewness trace closely to NBER-dated business-cycle phases.
|Date of creation:||30 Aug 2011|
|Date of revision:|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
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.:
- Anatolyev, Stanislav, 2009.
"Dynamic modeling under linear-exponential loss,"
Elsevier, vol. 26(1), pages 82-89, January.
- Gianni Amisano & Raffaella Giacomini, 2005.
"Comparing Density Forecsts via Weighted Likelihood Ratio Tests,"
ubs0504, University of Brescia, Department of Economics.
- Amisano, Gianni & Giacomini, Raffaella, 2007. "Comparing Density Forecasts via Weighted Likelihood Ratio Tests," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 177-190, April.
- Fabio Busetti & Andrew Harvey, 2011.
"When is a Copula Constant? A Test for Changing Relationships,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 9(1), pages 106-131, Winter.
- Busetti, F. & Harvey, A., 2008. "When is a copula constant? A test for changing relationships," Cambridge Working Papers in Economics 0841, Faculty of Economics, University of Cambridge.
- Anatolyev, Stanislav & Gospodinov, Nikolay, 2010. "Modeling Financial Return Dynamics via Decomposition," Journal of Business & Economic Statistics, American Statistical Association, vol. 28(2), pages 232-245.
- Neil Shephard & Ole Barndorff-Nielsen, 2003.
"Econometrics of testing for jumps in financial economics using bipower variation,"
Economics Series Working Papers
2004-FE-01, University of Oxford, Department of Economics.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2006. "Econometrics of Testing for Jumps in Financial Economics Using Bipower Variation," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 4(1), pages 1-30.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2004. "Econometrics of testing for jumps in financial economics using bipower variationÂ," OFRC Working Papers Series 2004fe01, Oxford Financial Research Centre.
- Ole E. Barndorff-Nielsen & Neil Shephard, 2003. "Econometrics of testing for jumps in financial economics using bipower variation," Economics Papers 2003-W21, Economics Group, Nuffield College, University of Oxford.
- Christian T. Brownlees & Fabrizio Cipollini & Giampiero M. Gallo, 2011. "Multiplicative Error Models," Econometrics Working Papers Archive 2011_03, Universita' degli Studi di Firenze, Dipartimento di Statistica, Informatica, Applicazioni "G. Parenti", revised Apr 2011.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:41248. 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: (Joachim Winter)
If references are entirely missing, you can add them using this form.