TY - JOUR
T1 - Long memory and the term structure of risk
AU - Schotman, P.C.
AU - Tschernig, R.J.V.
AU - Budek, J.
PY - 2008/1/1
Y1 - 2008/1/1
N2 - 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, and cash compared to estimates obtained from a stationary VAR. Results are sensitive to the inclusion of the short-term nominal interest rate in the prediction equation of excess stock returns. 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.
AB - 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, and cash compared to estimates obtained from a stationary VAR. Results are sensitive to the inclusion of the short-term nominal interest rate in the prediction equation of excess stock returns. 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.
U2 - 10.1093/jjfinec/nbn010
DO - 10.1093/jjfinec/nbn010
M3 - Article
SN - 1479-8409
VL - 6
SP - 459
EP - 495
JO - Journal of Financial Econometrics
JF - Journal of Financial Econometrics
IS - 4
ER -