Journal article
Predictability in International Asset Returns: A Reexamination
Journal of financial and quantitative analysis, Vol.35(4), pp.601-620
12/01/2000
DOI: 10.2307/2676257
Abstract
This paper argues that inferring long-horizon asset return predictability from the properties of vector autoregressive (VAR) models on relatively short spans of data is potentially unreliable. We illustrate the problems that can arise by reexamining the findings of Bekaert and Hodrick (1992), who detected evidence of in-sample predictability in international equity and foreign exchange markets using VAR methodology for a variety of countries from 1981-1989. The VAR predictions are significantly biased in most out-of-sample forecasts and are conclusively outperformed by a simple benchmark model at horizons of up to six months. This remains true even after corrections for small sample bias and the introduction of Bayesian parameter restrictions. A Monte Carlo analysis indicates that the data are unlikely to have been generated by a stable VAR. This conclusion is supported by an examination of structural break statistics. We show that implied long-horizon statistics calculated from the VAR parameter estimates are very unreliable.
Details
- Title: Subtitle
- Predictability in International Asset Returns: A Reexamination
- Creators
- Christopher J. Neely - Federal Reserve Bank of St. LouisPaul Weller - University of Iowa
- Resource Type
- Journal article
- Publication Details
- Journal of financial and quantitative analysis, Vol.35(4), pp.601-620
- DOI
- 10.2307/2676257
- ISSN
- 0022-1090
- eISSN
- 1756-6916
- Publisher
- Cambridge University Press
- Number of pages
- 20
- Language
- English
- Date published
- 12/01/2000
- Academic Unit
- Finance
- Record Identifier
- 9984963151602771
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