Long Memory and the Term Structure of Risk

Schotman, P. C. ; Tschernig, R. ; Budek, J.

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Zusammenfassung

This paper explores the implications of asset return predictability for long-term portfolio choice when return-forecasting variables are fractionally integrated. For important predictor variables, like the dividend-price ratio, and nominal and real interest rates, we estimate orders of integration around 0.8. This leads to substantial increases of the estimated long-term risk of stocks, bonds, ...