Direction-of-Change Forecasts Based on Conditional Variance, Skewness and Kurtosis Dynamics: International Evidence

32 Pages Posted: 12 Jun 2006

See all articles by Peter Christoffersen

Peter Christoffersen

University of Toronto - Rotman School of Management; Copenhagen Business School; Aarhus University - CREATES

Francis X. Diebold

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Roberto S. Mariano

Singapore Management University

Anthony S. Tay

Singapore Management University - School of Economics

Yiu Kuen Tse

Singapore Management University - School of Social Sciences

Date Written: February 2006

Abstract

Recent theoretical work has revealed a direct connection between asset return volatility forecastability and asset return sign forecastability. This suggests that the pervasive volatility forecastability in equity returns could, via induced sign forecastability, be used to produce direction-of-change forecasts useful for market timing. We attempt to do so in an international sample of developed equity markets, with some success, as assessed by formal probability forecast scoring rules such as the Brier score. An important ingredient is our conditioning not only on conditional mean and variance information, but also conditional skewness and kurtosis information, when forming direction-of-change forecasts.

Note: A previous version of this abstract can be found at: http://ssrn.com/abstract=523582

Keywords: Volatility, variance, skewness, kurtosis, market timing, asset management, asset allocation, portfolio management

JEL Classification: G10, G12

Suggested Citation

Christoffersen, Peter and Diebold, Francis X. and Mariano, Roberto S. and Tay, Anthony S. and Tse, Yiu Kuen, Direction-of-Change Forecasts Based on Conditional Variance, Skewness and Kurtosis Dynamics: International Evidence (February 2006). PIER Working Paper No. 06-016. Available at SSRN: https://ssrn.com/abstract=908317 or http://dx.doi.org/10.2139/ssrn.908317

Peter Christoffersen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5P 3C4
Canada
416-946-5511 (Phone)

Copenhagen Business School

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Aarhus University - CREATES

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Francis X. Diebold (Contact Author)

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-1507 (Phone)
215-573-4217 (Fax)

HOME PAGE: http://www.ssc.upenn.edu/~fdiebold/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Roberto S. Mariano

Singapore Management University ( email )

50 Stamford Rd.
Singapore 912409, 178899
Singapore

Anthony S. Tay

Singapore Management University - School of Economics ( email )

90 Stamford Road
178903
Singapore

Yiu Kuen Tse

Singapore Management University - School of Social Sciences ( email )

469 Bukit Timah Road
Federal Building #02-05
Singapore, 259756
Singapore
+65 822-0257 (Phone)
+65 822-8081 (Fax)

HOME PAGE: http://staff.mysmu.edu/yktse/yktsehp.htm

Register to save articles to
your library

Register

Paper statistics

Downloads
807
Abstract Views
3,170
rank
29,624
PlumX Metrics