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Does the Macroeconomy Predict UK Asset Returns in a Nonlinear Fashion? Comprehensive Out‐of‐Sample Evidence
Author(s) -
Guidolin Massimo,
Hyde Stuart,
McMillan David,
Ono Sadayuki
Publication year - 2014
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12035
Subject(s) - autoregressive model , econometrics , markov chain , autoregressive conditional heteroskedasticity , sample (material) , economics , nonlinear system , stock (firearms) , mathematics , statistics , volatility (finance) , engineering , mechanical engineering , chemistry , physics , chromatography , quantum mechanics
We perform a comprehensive examination of the recursive, comparative predictive performance of linear and nonlinear 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 including models with GARCH type specifications. Results demonstrate UK asset returns require nonlinear dynamics to be modelled with strong evidence in favour of Markov switching frameworks. Our results appear robust to the choice of sample period, changes in loss functions and to the methodology employed to test for equal predictive accuracy. The key findings extend to a similar sample of US data.