Forecasting Volatility States and Active Portfolio Strategies

21 Pages Posted: 21 Mar 2002

See all articles by Mattias Persson

Mattias Persson

Sveriges Riksbank

Birger Nilsson

Lund University - Department of Economics

Abstract

In this paper, we analyze the value of predicting index returns as well as volatility. On the basis of a three state regime-switching model we produce genuine out-of-sample forecasts for the volatility of the S&P 500. Using monthly data from 1900 to 1999, we test the statistical significance of return and volatility timing for mean-variance investors. We find strong evideince for market timing in both returns and volatility. Furthermore, adding the possibility of leverage do not add anything to the relationship between risk and return in the portfolios.

JEL Classification: G11, C15, C53, C61

Suggested Citation

Persson, Mattias and Nilsson, Birger, Forecasting Volatility States and Active Portfolio Strategies. Available at SSRN: https://ssrn.com/abstract=302686 or http://dx.doi.org/10.2139/ssrn.302686

Mattias Persson (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
SE- 103 37 Stockholm
Sweden

Birger Nilsson

Lund University - Department of Economics ( email )

P.O. Box 7082
S-220 07 Lund
Sweden

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