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Title:Does the macroeconomy predict UK asset returns in an nonlinear fashion? Comprehensive out-of-sample evidence PDF Logo
Authors:Guidolin, Massimo
Hyde, Stuart
McMillan, David
Ono, Sadayuki
Issue Date:2010
Series/Report no.:Manchester Business School working paper 607
Abstract:We perform a comprehensive examination of the recursive, comparative predictive performance of a number of linear and non-linear models for UK stock and bond returns. We estimate Markov switching, threshold autoregressive (TAR), and smooth transition autoregressive (STR) regime switching models, and a range of linear specifications in addition to univariate models in which conditional heteroskedasticity is captured by GARCH type specifications and in which predicted volatilities appear in the conditional mean. The results demonstrate that U.K. asset returns require non-linear dynamics be modeled. In particular, the evidence in favour of adopting a Markov switching framework is strong. Our results appear robust to the choice of sample period, changes in the adopted loss function and to the methodology employed to test the null hypothesis of equal predictive accuracy across competing models.
Subjects:regime switching
smooth transition
predictive regressions
Document Type:Working Paper
Appears in Collections:Manchester Business School Working Paper Series, The University of Manchester

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