Maximizing equity market sector predictability in a Bayesian time-varying parameter model

Applications of State Space Models in finance

“…This is illustrated by González-Rivera (1997) who integrate the conditional APT with betas modeled as random coefficients. In a more recent work on the predictability of U.S. sectors, Johnson and Sakoulis (2003) employ a Kalman filter with Bayesian parameter estimation to model the time-varying link between returns and lagged macroeconomic information as following a random walk.…”

“…It is usually defined as the weekly change in the difference between the yield of a 10-year Treasury bond and a 3-month Treasury bill. This factor is chosen to pick up risks that are reflected by a changing shape of the yield curve, as proposed, among others, by Chen et al (1986), Ferson and Harvey (1991) or Johnson and Sakoulis (2003). Changes in the slope of the yield curve capture both changes in the set of investment opportunities and changes in inflation expectations, which are partly driven by growth expectations.…”

On marginal likelihood computation in change-point models

“…Many researchers use the posterior mean, see e.g. Kim and Nelson (1999), Elerian, Chib, and Shephard (2001), Kim and Piger (2002), Kim, Morley, and Nelson (2005), Pesaran, Pettenuzzo, and Timmermann (2006), Johnson and Sakoulis (2008), Liu and Maheu (2008), Maheu and Gordon (2008), Fruhwirth-Schnatter and Wagner (2008), Nakajima and Omori (2009), and few, such as Paroli and Spezia (2008), use the mode. To the best of our knowledge, no study has clearly documented the sensitivity of the marginal likelihood value obtained by Chibs' method to the value of the parameter chosen for its computation in the case of Markov-switching models.…”

Can macroeconomic factors explain equity returns in the long run? The case of Jordan

“…Furthermore, other studies have attributed the predictable variation in the stock returns to the underlying economic fundamentals of the financial and industrial assets (Hassan et al, 2003;Yao, et al 2005;Johnson and Sakolis, 2008). Also, there are studies which have documented the co-movement between stock prices and economic 3 fundamentals (McMillan, 2005;Verma and Soydemir, 2006;Cheung and Ng, 1998;Teles, 2006 Andrade andTeles, 2008).…”