Predicting Long-term Financial Returns: VAR vs. DSGE Model – A Horse-Race

Details

Serval ID
serval:BIB_CA675FAB9C48
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
Predicting Long-term Financial Returns: VAR vs. DSGE Model – A Horse-Race
Journal
Journal of Money, Credit, and Banking
Author(s)
Jondeau E., Rockinger M.
Publication state
Published
Issued date
09/12/2018
Peer-reviewed
Oui
Volume
51
Number
8
Pages
2239-2291
Language
english
Abstract
This paper considers a U.S. institutional investor who is implementing a long-term portfolio allocation using forecasts of financial returns. We compare the predictive performance of two competing macro-finance models ---an unrestricted Vector AutoRegression (VAR) and a fully-structural Dynamic Stochastic General Equilibrium (DSGE) model--- for horizons up to 15 years. Although the performances are similar for short horizons, the DSGE model outperforms the VAR at forecasting financial returns in the long term. This model also generates substantially higher Sharpe ratios. Although it contains fewer unknown parameters, it benefits from economically grounded restrictions that help anchor financial returns in the long term.
Keywords
VAR, DSGE model, financial return forecasting, long-term allocation
Create date
18/03/2019 16:26
Last modification date
22/01/2020 7:19
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