In this paper, we evaluate the economic benefits that arise from allowing for long memory in forecasting the covariance matrix of returns over both short and long horizons, using the asset allocation framework of Engle and Colacito (2006). In particular, we compare the statistical and economic performance of four multivariate long memory volatility models (the long memory EWMA, long memory EWMA-DCC, FIGARCH-DCC and component GARCH-DCC models) with that of two short memory models (the short memory EWMA and GARCH-DCC models). We report two main findings. First, for longer horizon forecasts, long memory models produce forecasts of the covariance matrix that are statistically more accurate and informative, and economically more useful than those produced by short memory models. Second, the two parsimonious long memory EWMA models outperform the other models -both short memory and long memory -at all forecast horizons. These results apply to both low and high dimensional covariance matrices and both low and high correlation assets, and are robust to the choice of estimation window.
This study examines the determinants of foreign direct investment (FDI) from Europe to Asia based on the knowledge‐capital model. The data include 38 European countries and 24 host Asian countries over the period 1995–2013. Empirical evidence from Poisson‐pseudo maximum likelihood estimation method is in line with hypothesised predictions derived from the knowledge‐capital model. In particular, the total income and the similarity in market size between two countries encourage horizontal FDI. We also find empirical support to vertical FDI in Asia where the difference in skilled labour endowments between European source and Asia host countries has a positive impact on FDI from Europe to Asia. Meanwhile, investment costs in Asian countries, trade costs to both source and host countries, and exchange rate volatility are negatively correlated to FDI. By contrast, sharing a common language, a bilateral investment treaty and a historical colonial relationship encourage FDI from Europe to Asia. In addition, heterogeneities in host countries’ geographical regions, exchange rate regimes, and governance system, and source countries’ Eurozone membership lead to differences in empirical findings. The results also signal some future trends and the roles of governments in both source and host countries in facilitating FDI.
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