Portfolio Allocation for European Markets with Predictability and Parameter Uncertainty

Eric Jondeau and Michael Rockinger ()

No 10-41, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We implement a long-horizon static and dynamic portfolio allocation involving a risk-free and a risky asset. This model is calibrated at a quarterly frequency for ten European countries. We also use maximum-likelihood estimates and Bayesian estimates to account for parameter uncertainty. We find that for most European countries the dividend-price ratio and inflation have predictive power. For countries where returns are predictable, we demonstrate out- of-sample economic significance for the long-horizon allocation. Parameter uncertainty plays a second-order role, dominated by strong variation in the dynamic allocation itself induced by large variations in the state variables. The market timing appears economically relevant for many countries.

Keywords: Stock returns; Predictability; Estimation risk; Portfolio choice (search for similar items in EconPapers)
JEL-codes: C11 C22 C32 C51 C61 G11 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2010-08
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1041

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