Guidolin, M. and Ono, S. (2006) Are the Dynamic Linkages Between the Macroeconomy and Asset Prices Time-Varying? Journal of Economics and Business, 58 (5-6). pp. 480-518. ISSN 0148-6195
We estimate a number of multivariate regime switching VAR models on a long monthly US data set for eight variables that include excess stock and bond returns, the real T-bill yield, predictors used in the finance literature (default spread and the dividend yield), and three macroeconomic variables (inflation, industrial production growth, and a measure of real money growth). Heteroskedasticity may be accounted for by making the covariance matrix a function of the regime. We find evidence of four regimes and of time-varying covariances. We show that the best in-sample fit is provided by a four state model in which the VAR(1) component fails to be regime-dependent. We interpret this as evidence that the dynamic linkages between financial markets and the macroeconomy have been stable over time. The four-state model can be helpful in forecasting applications and provides one-step ahead predicted Sharpe ratios.
|Keywords:||Predictability; Multivariate regime switching; Predictive density tests; Sharpe ratios|
|Institution:||The University of York|
|Academic Units:||The University of York > Economics and Related Studies (York)|
|Depositing User:||York RAE Import|
|Date Deposited:||03 Aug 2009 15:15|
|Last Modified:||03 Aug 2009 15:15|