Modelling and forecasting stock returns: exploiting the futures market, regime shifts and international spillovers

Lucio Sarno and Giorgio Valente

Journal of Applied Econometrics, 2005, vol. 20, issue 3, 345-376

Abstract: This paper proposes a vector equilibrium correction model of stock returns that exploits the information in the futures market, while allowing for both regime‐switching behaviour and international spillovers across stock market indices. Using data for three major stock market indices since 1989, we find that: (i) in sample, our model outperforms several alternative models on the basis of standard statistical criteria; (ii) in out‐of‐sample forecasting, our model does not produce significant gains in terms of point forecasts relative to more parsimonious alternative specifications, but it does so both in terms of market timing ability and in density forecasting performance. The economic value of the density forecasts is illustrated with an application to a simple risk management exercise. Copyright © 2005 John Wiley & Sons, Ltd.

Date: 2005
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https://doi.org/10.1002/jae.787

Related works:
Journal Article: Modelling and forecasting stock returns: exploiting the futures market, regime shifts and international spillovers (2005)
Working Paper: Modelling and Forecasting Stock Returns: Exploiting the Futures Market, Regime Shifts and International Spillovers (2002)
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