Department of Economics and Business Economics

Predictable return distributions

Research output: Working paper/Preprint Working paperResearch

Documents

  • Rp10 38

    Final published version, 401 KB, PDF document

  • School of Economics and Management
This paper provides detailed insights into predictability of the entire stock and bond return distribution through the use of quantile regression. This allows us to examine speci…c parts of the return distribution such as the tails or the center, and for a suf…ciently …ne grid of quantiles we can trace out the entire distribution. A univariate quantile regression model is used to examine stock and bond return distributions individually, while a multivariate model is used to capture their joint distribution. An empirical analysis on US data shows that certain parts of the return distributions are predictable as a function of economic state variables. The results are, however, very different for stocks and bonds. The state variables primarily predict only location shifts in the stock return distribution, while they also predict changes in higher-order moments in the bond return distribution. Out-of-sample analyses show that the relative accuracy of the state variables in predicting future returns varies across the distribution. A portfolio study shows that an investor with power utility can obtain economic gains by applying the empirical return distribution in
portfolio decisions instead of imposing an assumption of lognormally distributed
returns.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages47
Publication statusPublished - 2010

    Research areas

  • Return predictability, return distribution, quantile regression, multivariate model, out-of-sample forecast, portfolio choice

See relations at Aarhus University Citationformats

Download statistics

No data available

ID: 21591973