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on Financial Markets |
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Issue of 2010‒04‒24
three papers chosen by |
| By: | Andrea Carriero (Queen Mary, University of London); George Kapetanios (Queen Mary, University of London); Massimiliano Marcellino (European University Institute and Bocconi University) |
| Abstract: | We propose a new approach to forecasting the term structure of interest rates, which allows to efficiently extract the information contained in a large panel of yields. In particular, we use a large Bayesian Vector Autoregression (BVAR) with an optimal amount of shrinkage towards univariate AR models. Focusing on the U.S., we provide an extensive study on the forecasting performance of our proposed model relative to most of the existing alternative specifications. While most of the existing evidence focuses on statistical measures of forecast accuracy, we also evaluate the performance of the alternative forecasts when used within trading schemes or as a basis for portfolio allocation. We extensively check the robustness of our results via subsample analysis and via a data based Monte Carlo simulation. We find that: i) our proposed BVAR approach produces forecasts systematically more accurate than the random walk forecasts, though the gains are small; ii) some models beat the BVAR for a few selected maturities and forecast horizons, but they perform much worse than the BVAR in the remaining cases; iii) predictive gains with respect to the random walk have decreased over time; iv) different loss functions (i.e., "statistical" vs "economic") lead to different ranking of specific models; v) modelling time variation in term premia is important and useful for forecasting. |
| Keywords: | Bayesian methods, Forecasting, Term structure |
| JEL: | C11 C53 E43 E47 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:qmw:qmwecw:wp662&r=fmk |
| By: | Friedrich Geiecke; Mark Trede |
| Abstract: | The recent introduction of new derivatives with future dividend payments as underlyings allows to construct a direct test of rational bubbles. We suggest a simple, new method to calculate the fundamental value of stock indices. Using this approach, bubbles become observable. We calculate the time series of the bubble component of the Euro-Stoxx 50 index and investigate its properties. Using a formal hypothesis test we find that the behavior of the bubble is compatible with rationality. |
| Keywords: | brand equity, price premium, hedonic regression, Bayesian estimation, dynamic linear model |
| JEL: | A |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cqe:wpaper:1310&r=fmk |
| By: | Johansson, Anders C. (China Economic Research Center) |
| Abstract: | This paper analyzes the relationship between stocks and bonds in nine Asian countries. Using a bivariate stochastic volatility model, we show that there are significant volatility spillover effects between stock and bond markets in several of the countries. Furthermore, dynamic correlation patterns show that the relationship between stock and bond markets changes considerably over time in all countries. Stock-bond correlation increases during periods of turmoil in several countries, indicating that there is a cross-asset contagion effect. Therefore, if there is a flight to quality effect in Asian markets, it seems to occur across countries or regions rather than across domestic assets. The results have direct and important implications for regional policy makers as well as domestic and international investors that invest in multiple asset classes. |
| Keywords: | Asia; stock markets; bond markets; stochastic volatility; Markov Chain Monte Carlo; spillover effects; dynamic correlation |
| JEL: | C32 F30 G12 G15 |
| Date: | 2010–04–01 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:hacerc:2010-014&r=fmk |