Predictive regressions with time-varying coefficients

Thomas Dangl and Michael Halling

Journal of Financial Economics, 2012, vol. 106, issue 1, 157-181

Abstract: We evaluate predictive regressions that explicitly consider the time-variation of coefficients in a comprehensive Bayesian framework. For monthly returns of the S&P 500 index, we demonstrate statistical as well as economic evidence of out-of-sample predictability: relative to an investor using the historic mean, an investor using our methodology could have earned consistently positive utility gains (between 1.8% and 5.8% per year over different time periods). We also find that predictive models with constant coefficients are dominated by models with time-varying coefficients. Finally, we show a strong link between out-of-sample predictability and the business cycle.

Keywords: Empirical asset pricing; Equity return prediction; Bayesian econometrics (search for similar items in EconPapers)
JEL-codes: C11 G12 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (275)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:1:p:157-181

DOI: 10.1016/j.jfineco.2012.04.003

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