Does the macroeconomy predict U.K. asset returns in a nonlinear fashion? comprehensive out-of-sample evidence

Massimo Guidolin, Stuart Hyde, David McMillan and Sadayuki Ono

No 2010-039, Working Papers from Federal Reserve Bank of St. Louis

Abstract: 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.

Keywords: Forecasting; Econometric models; Rate of return; Great Britain (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba and nep-for
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Citations: View citations in EconPapers (3)

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Journal Article: Does the Macroeconomy Predict UK Asset Returns in a Nonlinear Fashion? Comprehensive Out-of-Sample Evidence (2014)
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