Abstract

http://ssrn.com/abstract=243587
 
 

Citations



 


 



Predictability in International Asset Returns: A Reexamination


Christopher J. Neely


Federal Reserve Bank of St. Louis - Research Division

Paul A. Weller


University of Iowa - Department of Finance


Journal of Financial and Quantitative Analysis, Vol. 35, No. 4, December 2000

Abstract:     
This paper argues that inferring long-horizon asset-return predictability from the properties of vector autoregressive (VAR) models on relatively short spans of data is potentially unreliable. We illustrate the problems that can arise by re-examining the findings of Bekaert and Hodrick (1992), who detected evidence of in-sample predictability in international equity and foreign exchange markets using VAR methodology for a variety of countries over the period 1981-1989. The VAR predictions are significantly biased in most out-of-sample forecasts and are conclusively outperformed by a simple benchmark model at horizons of up to six months. This remains true even after corrections for small sample bias and the introduction of Bayesian parameter restrictions. A Monte Carlo analysis indicates that the data are unlikely to have been generated by a stable VAR. This conclusion is supported by an examination of structural break statistics. Implied long-horizon statistics calculated from the VAR parameter estimates are shown to be very unreliable.

Keywords: Vector autoregression, asset price, exchange rate, forecasting

JEL Classification: C32, F30

Accepted Paper Series


Not Available For Download

Date posted: January 5, 2001  

Suggested Citation

Neely, Christopher J. and Weller, Paul A., Predictability in International Asset Returns: A Reexamination. Journal of Financial and Quantitative Analysis, Vol. 35, No. 4, December 2000. Available at SSRN: http://ssrn.com/abstract=243587

Contact Information

Christopher J. Neely (Contact Author)
Federal Reserve Bank of St. Louis - Research Division ( email )
411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)
HOME PAGE: http://www.stls.frb.org/research/econ/cneely/
Paul A. Weller
University of Iowa - Department of Finance ( email )
Iowa City, IA 52242-1000
United States
319-335-1017 (Phone)
319-335-3690 (Fax)
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