Search Results

Showing results 1 to 5 of approximately 5.

(refine search)
SORT BY: PREVIOUS / NEXT
Author:Hyde, Stuart 

Working Paper
Equity portfolio diversification under time-varying predictability and comovements: evidence from Ireland, the US, and the UK
We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among short-term interest rates (monetary policy) and stock returns in the Irish, the US and UK markets. We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of returns and short-term rates. This implies that we cannot reject the hypothesis that the regimes driving the markets in the small open economy are largely synchronous with those typical of the major markets. We compute time-varying Sharpe ratios and recursive mean-variance portfolio weights and document that a regime switching framework produces out-of-sample portfolio performance that outperforms simpler models that ignore regimes. Interestingly, the portfolio shares derived under regime switching dynamics implies a fairly low commitment to the Irish market, in spite of its brilliant unconditional risk-return trade-off.
AUTHORS: Guidolin, Massimo; Hyde, Stuart
DATE: 2008

Working Paper
Can VAR models capture regime shifts in asset returns? a long-horizon strategic asset allocation perspective
In the empirical portfolio choice literature it is often invoked that through the choice of predictors that may closely track business cycle conditions and market sentiment, simple Vector Autoregressive (VAR) models could produce optimal strategic portfolio allocations that hedge against the bull and bear dynamics typical of financial markets. However, a distinct literature exists that shows that non-linear econometric frameworks, such as Markov switching, are also natural tools to compute optimal portfolios arising from the existence of good and bad market states. In this paper we examine whether and how simple VARs can produce empirical portfolio rules similar to those obtained under a range of multivariate Markov switching models, by studying the effects of expanding both the order of the VAR and the number/selection of predictor variables included. In a typical stock-bond strategic asset allocation problem on US data, we compute the out-of-sample certainty equivalent returns for a wide range of VARs and compare these measures of performance with those typical of non-linear models that account for bull-bear dynamics and characterize the differences in the implied hedging demands for a long-horizon investor with constant relative risk aversion preferences. We conclude that most (if not all) VARs cannot produce portfolio rules, hedging demands, or out-of-sample performances that approximate those obtained from equally simple non-linear frameworks.
AUTHORS: Guidolin, Massimo; Hyde, Stuart
DATE: 2010

Working Paper
Non-linear predictability in stock and bond returns: when and where is it exploitable?
We systematically examine the comparative predictive performance of a number of alternative linear and non-linear models for stock and bond returns in the G7 countries. Besides Markov switching, threshold autoregressive (TAR), and smooth transition autoregressive (STAR) regime switching (predictive) regression models, we also estimate univariate models in which conditional heteroskedasticity is captured through GARCH, TARCH and EGARCH models and ARCH-in mean effects appear in the conditional mean. Although we fail to find a consistent winner/out-performer across all countries and asset markets, it turns out that capturing non-linear effects is of extreme importance to improve forecasting performance. U.S. and U.K. asset return data are ?special? in the sense that good predictive performance seems to loudly ask for models that capture non linear dynamics, especially of the Markov switching type. Although occasionally also stock and bond return forecasts for other G7 countries appear to benefit from non-linear modeling (especially of TAR and STAR type), data from France, Germany, and Italy express interesting predictive results on the basis of simpler benchmarks. U.S. and U.K. data are also the only two data sets in which we find statistically significant differences between forecasting models. Results appear to be remarkably stable over time, and robust to the specification of the loss function used in statistical evaluations as well as to the methodology employed to perform pairwise comparisons.
AUTHORS: Guidolin, Massimo; Hyde, Stuart; McMillan, David; Ono, Sadayuki
DATE: 2009

Working Paper
Does the macroeconomy predict U.K. asset returns in a nonlinear fashion? comprehensive out-of-sample evidence
We perform a comprehensive examination of the recursive, comparative predictive performance of a number of linear and non-linear models for UK stock and bond returns. We estimate Markov switching, threshold autoregressive (TAR), and smooth transition autoregressive (STR) regime switching models, and a range of linear specifications in addition to univariate models in which conditional heteroskedasticity is captured by GARCH type specifications and in which predicted volatilities appear in the conditional mean. The results demonstrate that U.K. asset returns require non-linear dynamics be modeled. In particular, the evidence in favor of adopting a Markov switching framework is strong. Our results appear robust to the choice of sample period, changes in the adopted loss function and to the methodology employed to test the null hypothesis of equal predictive accuracy across competing models.
AUTHORS: Guidolin, Massimo; Hyde, Stuart; McMillan, David; Ono, Sadayuki
DATE: 2010

Working Paper
What tames the Celtic tiger? portfolio implications from a multivariate Markov switching model
We use multivariate regime switching vector autoregressive models to characterize the time-varying linkages among the Irish stock market, one of the top world performers of the 1990s, and the US and UK stock markets. We find that two regimes, characterized as bear and bull states, are required to characterize the dynamics of excess equity returns both at the univariate and multivariate level. This implies that the regimes driving the small open economy stock market are largely synchronous with those typical of the major markets. However, despite the existence of a persistent bull state in which the correlations among Irish and UK and US excess returns are low, we find that state comovements involving the three markets are so relevant to reduce the optimal mean variance weight carried by ISEQ stocks to at most one-quarter of the overall equity portfolio. We compute time-varying Sharpe ratios and recursive mean-variance portfolio weights and document that a regime switching framework produces out-of-sample portfolio performance that outperforms simpler models that ignore regimes. These results appear robust to endogenizing the effects of dynamics in spot exchange rates on excess stock returns.
AUTHORS: Guidolin, Massimo; Hyde, Stuart
DATE: 2007

FILTER BY year

FILTER BY Bank

FILTER BY Series

FILTER BY Content Type

FILTER BY Author

FILTER BY Keywords

PREVIOUS / NEXT