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
Abstract
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.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Keywords: | Predictability; Multivariate regime switching; Predictive density tests; Sharpe ratios |
Dates: |
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Institution: | The University of York |
Academic Units: | The University of York > Faculty of Social Sciences (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 |
Published Version: | http://dx.doi.org/10.1016/j.jeconbus.2006.06.009 |
Status: | Published |
Publisher: | Elsevier |
Identification Number: | 10.1016/j.jeconbus.2006.06.009 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:6628 |