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Equity Premium Forecasts with an Unknown Number of Structural Breaks

Research output: Contribution to journalArticle

  • George Bulkley
  • Simon Smith
  • david leslie
Original languageEnglish
Article numbernby034
Number of pages36
JournalJournal of Financial Econometrics
Early online date12 Jan 2019
DOIs
DateAccepted/In press - 8 Dec 2018
DateE-pub ahead of print (current) - 12 Jan 2019

Abstract

Estimation of models with structural breaks usually assumes a pre-specied 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.

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    Rights statement: This is the accepted author manuscript (AAM). The final published version (version of record) is available online via Oxford Academic at https://doi.org/10.1093/jjfinec/nby034 . Please refer to any applicable terms of use of the publisher.

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