Market Timing and Return Prediction under Model Instability ∗

@inproceedings{Pesaran2002MarketTA,
  title={Market Timing and Return Prediction under Model Instability ∗},
  author={M. Hashem Pesaran and Allan Timmermann},
  year={2002}
}
Despite mounting empirical evidence to the contrary, the literature on predictability of stock returns almost uniformly assumes a time-invariant relationship between state variables and returns. In this paper we propose a two-stage approach for forecasting of financial return series that are subject to breaks. The first stage adopts a reversed ordered Cusum (ROC) procedure to determine in real time when the most recent break has occurred. In the second stage, post-break data is used to estimate… CONTINUE READING
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