The authors are grateful to the Editor, Christopher Bowdler and two anonymous referees for comments and suggestions which substantially improved the article.
Does the Macroeconomy Predict UK Asset Returns in a Nonlinear Fashion? Comprehensive Out-of-Sample Evidence†
Article first published online: 9 JUN 2013
© 2013 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
Oxford Bulletin of Economics and Statistics
Volume 76, Issue 4, pages 510–535, August 2014
How to Cite
Guidolin, M., Hyde, S., McMillan, D. and Ono, S. (2014), Does the Macroeconomy Predict UK Asset Returns in a Nonlinear Fashion? Comprehensive Out-of-Sample Evidence. Oxford Bulletin of Economics and Statistics, 76: 510–535. doi: 10.1111/obes.12035
- Issue published online: 3 JUL 2014
- Article first published online: 9 JUN 2013
- Manuscript Received: APR 2013
We perform a comprehensive examination of the recursive, comparative predictive performance of linear and nonlinear models for UK stock and bond returns. We estimate Markov switching, threshold autoregressive (TAR) and smooth transition autoregressive (STR) regime switching models and a range of linear specifications including models with GARCH type specifications. Results demonstrate UK asset returns require nonlinear dynamics to be modelled with strong evidence in favour of Markov switching frameworks. Our results appear robust to the choice of sample period, changes in loss functions and to the methodology employed to test for equal predictive accuracy. The key findings extend to a similar sample of US data.