Predictive Regressions with Time-Varying Coefficients

49 Pages Posted: 15 Mar 2009

See all articles by Thomas Dangl

Thomas Dangl

Vienna University of Technology

Michael Halling

University of Luxembourg

Multiple version iconThere are 3 versions of this paper

Date Written: March, 13 2009

Abstract

We evaluate predictive regressions that explicitly consider the time-variation of coefficients in a comprehensive Bayesian framework. This allows for fast and consistent adjustment of regression coefficients to changes in the underlying economic relationships. For monthly returns of the S&P 500 index, we demonstrate statistical as well as economic evidence of out-of-sample predictability: relative to an investor using the historic mean an investor using our methodology could have earned consistently positive utility gains (between 1.8 and 5.8% p.a. over different time periods). Furthermore, we show that predictive models with constant coefficients are dominated by models with time-varying coefficients.

Keywords: Empirical asset pricing, equity return prediction, Bayesian econometrics

JEL Classification: G12, C11

Suggested Citation

Dangl, Thomas and Halling, Michael, Predictive Regressions with Time-Varying Coefficients (March, 13 2009). Available at SSRN: https://ssrn.com/abstract=1359272 or http://dx.doi.org/10.2139/ssrn.1359272

Thomas Dangl

Vienna University of Technology ( email )

Theresianumgasse 27
Vienna, A-1040
Austria

Michael Halling (Contact Author)

University of Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
253
Abstract Views
1,489
Rank
50,892
PlumX Metrics