A Predictive System with Heteroscedastic Expected Returns and Economic Constraints
Maxime Bonelli, Daniel Mantilla-Garcia: We propose a variation of a predictive system that incorporates two (additional) economically motivated assumptions about the dynamics of expected returns, namely 1) their positivity, and 2) a time-varying volatility correlated with economic regimes.
Author(s):
Research Engineer, Koris International
Research Associate, EDHEC-Risk InstituteHead of Research & Development, Koris International
The implications of the modified system are consistent with well established empirical facts of stock returns, in particular, the simpler version of the modified system without predictors can explain the well documented countercyclicality of the dividend-price ratio’s predictive power. In empirical tests we find that the system can produce significantly lower forecast errors than the historical mean out-ofsample as well as some improvement compared to the original system.
| Type: | Working paper |
|---|---|
| Date: | le 07/07/2014 |
| Research Cluster : | Finance |
See Also
About EDHEC
Operating from campuses in Lille, Nice, Paris, London and Singapore, EDHEC is one of the top 15 European business schools. Fully international and directly connected to the business world, EDHEC is a school for business, rather than a business school, where excellence in teaching and research focuses on innovation to stimulate entrepreneurship and creativity. EDHEC functions as a genuine laboratory of ideas and produces innovative solutions valued by businesses. The School’s teaching philosophy, inspired by its award-winning research activities, focuses on “learning by doing”.
