Asset Prices and International Spillovers: An Empirical Investigation

38 Pages Posted: 21 May 2004

See all articles by Giorgio Valente

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR)

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Date Written: May 2004

Abstract

This Paper proposes a vector equilibrium correction model of stock returns that exploits the information in the futures market, while allowing for both regime-switching behaviour and international spillovers across stock market indices. Using data for three major stock market indices since 1989, we find that: (i) in sample, our model outperforms several alternative models on the basis of standard statistical criteria; (ii) in out-of-sample forecasting, our model does not produce significant gains in terms of point forecasts relative to more parsimonious alternative specifications, but it does so both in terms of market timing ability and in density forecasting performance. The economic value of the density forecasts is illustrated with an application to a simple risk management exercise.

Keywords: Asset prices, international spillovers, forecasting, non-linearity

JEL Classification: F31, G10, G13

Suggested Citation

Valente, Giorgio and Sarno, Lucio, Asset Prices and International Spillovers: An Empirical Investigation (May 2004). CEPR Discussion Paper No. 4380. Available at SSRN: https://ssrn.com/abstract=549321

Giorgio Valente

Hong Kong Institute for Monetary and Financial Research (HKIMR) ( email )

One Pacific Place, 10th Floor
88 Queensway
Hong Kong
China

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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