Final published version
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Equity Premium Forecasts with an Unknown Number of Structural Breaks
AU - Smith, Simon C.
AU - Bulkley, George
AU - Leslie, David S.
PY - 2020/1/1
Y1 - 2020/1/1
N2 - Estimation of models with structural breaks usually assumes a pre-specified number of breaks. Previous models which do allow an endogenously determined number of breaks require a simple structural model, and rarely allow for information transfer across the break. We introduce a methodology that allows the number of breaks to be determined endogenously and including an economically motivated model of transition regimes between each break. We demonstrate the usefulness of our approach for forecasts of the equity premium. We find the demonstrated success of the historical average can be improved upon by an economic model with theory informed priors estimated using our methodology.
AB - Estimation of models with structural breaks usually assumes a pre-specified number of breaks. Previous models which do allow an endogenously determined number of breaks require a simple structural model, and rarely allow for information transfer across the break. We introduce a methodology that allows the number of breaks to be determined endogenously and including an economically motivated model of transition regimes between each break. We demonstrate the usefulness of our approach for forecasts of the equity premium. We find the demonstrated success of the historical average can be improved upon by an economic model with theory informed priors estimated using our methodology.
KW - equity premium
KW - structural breaks
KW - forecasting
KW - Bayesian
KW - MULTIPLE CHANGE-POINT
KW - TIME-SERIES
KW - INFERENCE
KW - MODELS
KW - SAMPLE
KW - PREDICTABILITY
KW - COMPUTATION
KW - INSTABILITY
U2 - 10.1093/jjfinec/nby034
DO - 10.1093/jjfinec/nby034
M3 - Journal article
VL - 18
SP - 59
EP - 94
JO - Journal of Financial Econometrics
JF - Journal of Financial Econometrics
SN - 1479-8409
IS - 1
ER -