Schotman, Peter and Tschernig, Rolf and Budek, Jan (2008) Long Memory and the Term Structure of Risk. Regensburger Diskussionsbeiträge zur Wirtschaftswissenschaft 427, Working Paper.
Supplement to Long Memory and the Term Strukture of Risk: Some Monte Carlo Results on Semiparametric Long Memory Estimation,
This paper explores the implications of asset return predictability on long-term portfolio choice when return forecasting variables exhibit long memory. We model long memory using the class of fractionally integrated time series models. Important predictor variables for U.S. data, like the dividend-price ratio and nominal and real interest rates, are non-stationary with orders of integration around 0.8. These time series properties lead to substantial increases of the estimated long-term risk of stocks, bonds and cash compared to earlier estimates obtained from a stationary VAR. Long-term risk increases because the
fluctuations in the predictor variables imply that expected returns themselves become a significant source of long-term risk. We find that results are sensitive to the specification of the prediction equation of excess stock returns. The inclusion of the short-term nominal interest rate among the predictor variables has the most profound impact. Jointly with the dividend-price ratio it has significant predictive power, but contrary to the dividend-price ratio the nominal interest rate does not induce mitigating effects through mean reversion.
|Item Type:||Monograph (Working Paper)|
|Institutions:||Business, Economics and Information Systems > Institut für Volkswirtschaftslehre und Ökonometrie > Lehrstuhl für Ökonometrie (Prof. Dr. Rolf Tschernig)|
|Keywords:||Long-term portfolio choice; Term structure of risk; Linear processes with fractional integration|
|Subjects:||300 Social sciences > 330 Economics|
|Refereed:||No, this version has not been refereed yet (as with preprints)|
|Created at the University of Regensburg:||Yes|
|Owner:||Prof. Dr. Rolf Tschernig|
|Deposited On:||08 Dec 2008 16:49|
|Last Modified:||20 Jul 2011 21:23|
Available Versions of this Item
Long Memory and the Term Structure of Risk, working paper WP 06-009. (deposited 02 Aug 2006)
- Long Memory and the Term Structure of Risk. (deposited 08 Dec 2008 16:49) [Currently Displayed]