Does Stock Return Predictability Imply Improved Asset Allocation and Performance? Evidence from the U.S. Stock Market (1954-2002). PDF Download
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Author: Puneet Handa
Publisher:
ISBN:
Category :
Languages : en
Pages : 55
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Book Description
This paper provides evidence on the economic significance of U.S. stock return predictability within an asset allocation framework in a real-time context. We examine the performance of a Bayesian, risk averse investor (the mutual fund investor) who relies on conditioning information (e.g., dividend yield, T-bill yield, default spread and term spread) to forecast future returns, and contrast it with that of an otherwise identical investor who believes that the returns are i.i.d. (the i.i.d. investor). Our major finding is that the relative performance of the mutual fund strategy is unstable over time, being noticeably poor during the most recent sub-period (1989-2002). In marked contrast, the performance of the mutual fund strategy is significantly better when it relies on a model-based approach, characterized by varying degrees of prior confidence in the CAPM.
Author: Puneet Handa
Publisher:
ISBN:
Category :
Languages : en
Pages : 55
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Book Description
This paper provides evidence on the economic significance of U.S. stock return predictability within an asset allocation framework in a real-time context. We examine the performance of a Bayesian, risk averse investor (the mutual fund investor) who relies on conditioning information (e.g., dividend yield, T-bill yield, default spread and term spread) to forecast future returns, and contrast it with that of an otherwise identical investor who believes that the returns are i.i.d. (the i.i.d. investor). Our major finding is that the relative performance of the mutual fund strategy is unstable over time, being noticeably poor during the most recent sub-period (1989-2002). In marked contrast, the performance of the mutual fund strategy is significantly better when it relies on a model-based approach, characterized by varying degrees of prior confidence in the CAPM.
Author: Chris Brooks
Publisher: Cambridge University Press
ISBN: 1139472305
Category : Business & Economics
Languages : en
Pages : 752
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Book Description
This best-selling textbook addresses the need for an introduction to econometrics specifically written for finance students. Key features: • Thoroughly revised and updated, including two new chapters on panel data and limited dependent variable models • Problem-solving approach assumes no prior knowledge of econometrics emphasising intuition rather than formulae, giving students the skills and confidence to estimate and interpret models • Detailed examples and case studies from finance show students how techniques are applied in real research • Sample instructions and output from the popular computer package EViews enable students to implement models themselves and understand how to interpret results • Gives advice on planning and executing a project in empirical finance, preparing students for using econometrics in practice • Covers important modern topics such as time-series forecasting, volatility modelling, switching models and simulation methods • Thoroughly class-tested in leading finance schools. Bundle with EViews student version 6 available. Please contact us for more details.
Author: Emilio Barucci
Publisher: Springer
ISBN: 1447173228
Category : Mathematics
Languages : en
Pages : 843
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Book Description
This work, now in a thoroughly revised second edition, presents the economic foundations of financial markets theory from a mathematically rigorous standpoint and offers a self-contained critical discussion based on empirical results. It is the only textbook on the subject to include more than two hundred exercises, with detailed solutions to selected exercises. Financial Markets Theory covers classical asset pricing theory in great detail, including utility theory, equilibrium theory, portfolio selection, mean-variance portfolio theory, CAPM, CCAPM, APT, and the Modigliani-Miller theorem. Starting from an analysis of the empirical evidence on the theory, the authors provide a discussion of the relevant literature, pointing out the main advances in classical asset pricing theory and the new approaches designed to address asset pricing puzzles and open problems (e.g., behavioral finance). Later chapters in the book contain more advanced material, including on the role of information in financial markets, non-classical preferences, noise traders and market microstructure. This textbook is aimed at graduate students in mathematical finance and financial economics, but also serves as a useful reference for practitioners working in insurance, banking, investment funds and financial consultancy. Introducing necessary tools from microeconomic theory, this book is highly accessible and completely self-contained. Advance praise for the second edition: "Financial Markets Theory is comprehensive, rigorous, and yet highly accessible. With their second edition, Barucci and Fontana have set an even higher standard!"Darrell Duffie, Dean Witter Distinguished Professor of Finance, Graduate School of Business, Stanford University "This comprehensive book is a great self-contained source for studying most major theoretical aspects of financial economics. What makes the book particularly useful is that it provides a lot of intuition, detailed discussions of empirical implications, a very thorough survey of the related literature, and many completely solved exercises. The second edition covers more ground and provides many more proofs, and it will be a handy addition to the library of every student or researcher in the field."Jaksa Cvitanic, Richard N. Merkin Professor of Mathematical Finance, Caltech "The second edition of Financial Markets Theory by Barucci and Fontana is a superb achievement that knits together all aspects of modern finance theory, including financial markets microstructure, in a consistent and self-contained framework. Many exercises, together with their detailed solutions, make this book indispensable for serious students in finance."Michel Crouhy, Head of Research and Development, NATIXIS
Author: Friedrich Christian Kruse
Publisher: BoD – Books on Demand
ISBN: 3844101853
Category : Business & Economics
Languages : en
Pages : 222
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Book Description
Finance researchers and asset management practitioners put a lot of effort into the question of optimal asset allocation. With this respect, a lot of research has been conducted on portfolio decision making as well as quantitative modeling and prediction models. This study brings together three fields of research, which are usually analyzed in an isolated manner in the literature: - Predictability of asset returns and their covariance matrix - Optimal portfolio decision making - Nonlinear modeling, performed by artificial neural networks, and their impact on predictions as well as optimal portfolio construction Including predictability in asset allocation is the focus of this work and it pays special attention to issues related to nonlinearities. The contribution of this study to the portfolio choice literature is twofold. First, motivated by the evidence of linear predictability, the impact of nonlinear predictions on portfolio performances is analyzed. Predictions are empirically performed for an investor who invests in equities (represented by the DAX index), bonds (represented by the REXP index) and a risk-free rate. Second, a solution to the dynamic programming problem for intertemporal portfolio choice is presented. The method is based on functional approximations of the investor's value function with artificial neural networks. The method is easily capable of handling multiple state variables. Hence, the effect of adding predictive parameters to the state space is the focus of analysis as well as the impacts of estimation biases and the view of a Bayesian investor on intertemporal portfolio choice. One important empirical result shows that residual correlation among state variables have an impact on intertemporal portfolio decision making.
Author: Arthur Ritter
Publisher: GRIN Verlag
ISBN: 3656968926
Category : Business & Economics
Languages : en
Pages : 21
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Book Description
Research Paper (postgraduate) from the year 2015 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 17 (1,3), University of St Andrews (School of Management), course: Investment and Portfolio Management, language: English, abstract: Empirical evidence of stock return predictability obtained by financial ratios or macroeconomic factors has received substantial attention and remains a controversial topic to date. This is no surprise given that the existence of return predictability is not only of interest to practitioners but also introduces severe implications for financial models of risk and return. Founded on the assumption of efficient capital markets, research on capital asset pricing models has instigated this emergence of stock return predictability factors. Analysing these factors categorically, this paper will provide a balanced discussion of advocates as well as sceptics of stock return predictability. This essay will commence by firstly outlining the fundamental assumptions of an efficient capital market and its implications for return predictability. Subsequently, a thorough focus will be placed on the most significant predictability factors, including fundamental financial ratios and macroeconomic indicators as well as the validity of sampling methods used to attain return forecasts. Lastly this essay will reflect on the findings while proposing areas of further research.
Author: Anselm Rogowski
Publisher:
ISBN: 9783656968931
Category :
Languages : en
Pages : 20
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Book Description
Research Paper from the year 2015 in the subject Business economics - Banking, Stock Exchanges, Insurance, Accounting, grade: 17 (1,3), University of St Andrews (School of Management), course: Investment and Portfolio Management, language: English, abstract: Empirical evidence of stock return predictability obtained by financial ratios or macroeconomic factors has received substantial attention and remains a controversial topic to date. This is no surprise given that the existence of return predictability is not only of interest to practitioners but also introduces severe implications for financial models of risk and return. Founded on the assumption of efficient capital markets, research on capital asset pricing models has instigated this emergence of stock return predictability factors. Analysing these factors categorically, this paper will provide a balanced discussion of advocates as well as sceptics of stock return predictability. This essay will commence by firstly outlining the fundamental assumptions of an efficient capital market and its implications for return predictability. Subsequently, a thorough focus will be placed on the most significant predictability factors, including fundamental financial ratios and macroeconomic indicators as well as the validity of sampling methods used to attain return forecasts. Lastly this essay will reflect on the findings while proposing areas of further research.
Author: British Library of Political and Economic Science Staff
Publisher: Routledge
ISBN: 9780415447171
Category : Business & Economics
Languages : en
Pages : 664
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Book Description
First published in 2007. Routledge is an imprint of Taylor & Francis, an informa company.
Author: Dashan Huang
Publisher:
ISBN:
Category : Electronic dissertations
Languages : en
Pages : 134
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Book Description
My research field is asset pricing with a focus on return predictability, innovation and market efficiency, and delegated investment management. In Chapter 1, "Maximum Return Predictability", I develop two theoretical upper bounds on the R2 of the regression of stock returns on predictive variables. Empirically, I found that the predictive R2s are significantly larger than the upper bounds, implying that existing asset pricing models are incapable of explaining the degree of return predictability. For example, the predictive R2 of the price dividend ratio for the U.S. market forecasting is 0.27% with monthly data. However, the theoretical upper bound is at most 0.07% with respect to CAPM, Fama-French three-factor model, CARA, habitat-formation model, long-run risk model, or rare disaster model. The finding of this paper suggests the development of new asset pricing models with new state variables that are highly correlated with stock returns. Recently, several papers found that the predictive power of almost all the existing macroeconomic variables exists only during economic recessions but does not exist over economic expansions. There perhaps have two reasons. First, existing predictors are individual economic variables and cannot capture the dynamics of the whole market. Second, the recognized predictive regression does not distinguish the varying ability of macro variables in forecasting the financial market. In Chapter 2, "Economic and Market Conditions: Two State Variables that Predict the Stock Market," Guofu Zhou and I identify two new predictors that capture the state of the economy and the state of the market condition, and found that the forecast of the market risk premium by the two predictors outperform a pooled forecast of dozens of existing predictors. Moreover, they forecast the stock market not only during down turns of the economy, but also during the up turns when other predictors fail. In decentralized investment management, there is always a friction between the principal and the manager. In Chapter 3, "The Servant of Two Masters: A Common Agency Explanation for Side-by-Side Management," I present a common agency model to study side-by-side (SBS) management in which a manager simultaneously manages two funds and separately contracts with the two different fund principals. The contracting is decentralized and includes two types of externalities: the manager's efforts are substitutable and the performance in one fund can generate a spillover effect on the other fund. The two principals can choose competition or free-riding. Under public contracting, competition is more likely to dominate free-riding. Under private contracting, however, free-riding becomes more important. In either case, SBS could generate better performance than standalone management.
Author: Jae H. Kim
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
This paper examines return predictability of the U.S. stock market using portfolios sorted by size, book-to-market ratio, and industry. A novel panel variance ratio test is proposed and employed to evaluate time-varying return predictability from 1964 to 2011. It is found that the stock returns have been highly predictable from 1964 to 1996, except for a period around the 1987 stock market crash. After 1997, the stock returns have been unpredictable overall. At a disaggregated level, size and technology have been the major contributors to cross-sectional differences in informational efficiency.
Author: Amélie Charles
Publisher:
ISBN:
Category :
Languages : en
Pages : 33
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Book Description
We investigate whether stock returns of international markets are predictable from a range of fundamentals including key financial ratios (dividend-price ratio, dividend-yield, earnings-price ratio, dividend-payout ratio), technical indicators (price pressure, change in volume), and short-term interest rates. We adopt two new alternative testing and estimation methods: the improved augmented regression method and wild bootstrapping of predictive model based on a restricted VAR form. Both methods take explicit account of endogeneity of predictors, providing bias-reduced estimation and improved statistical inference in small samples. From monthly data of 16 Asia-Pacific (including U.S.) and 21 European stock markets from 2000 to 2014, we find that the financial ratios show weak predictive ability with small effect sizes and poor out-of-sample forecasting performances. In contrast, the price pressure and interest rate are found to be strong predictors for stock return with large effect sizes and satisfactory out-of-sample forecasting performance.
