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Predictive Regressions with Time-Varying Coefficients

Thomas Dangl

Vienna University of Technology

Michael Halling

Swedish House of Finance

September 29, 2011

We evaluate predictive regressions that explicitly consider the time-variation of coefficients in a comprehensive Bayesian framework. 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). We also find that predictive models with constant coefficients are dominated by models with time-varying coefficients. Finally, we show a strong link between out-of-sample predictability and the business cycle.

Number of Pages in PDF File: 77

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

JEL Classification: G12, C11

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Date posted: March 17, 2010 ; Last revised: September 29, 2011

Suggested Citation

Dangl , Thomas and Halling, Michael, Predictive Regressions with Time-Varying Coefficients (September 29, 2011). Available at SSRN: https://ssrn.com/abstract=1571670 or http://dx.doi.org/10.2139/ssrn.1571670

Contact Information

Thomas Dangl (Contact Author)
Vienna University of Technology ( email )
Theresianumgasse 27
Vienna, A-1040
Michael Halling
Swedish House of Finance ( email )
Drottninggatan 98
111 60 Stockholm

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References:  111
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