Journal of Financial Economics Vol. 106 No. 1 2012
Predictive regressions with time-varying coefficients
open access
Abstract
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% per year 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.
- DOI
- 10.1016/j.jfineco.2012.04.003
- Volume
- 106
- Issue
- 1
- Pages
- 157-181
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref