Direction-of-Change Forecasts Based on Conditional Variance, Skewness and Kurtosis Dynamics: International Evidence
32 Pages Posted: 12 Jun 2006
Date Written: February 2006
Recent theoretical work has revealed a direct connection between asset return volatility forecastability and asset return sign forecastability. This suggests that the pervasive volatility forecastability in equity returns could, via induced sign forecastability, be used to produce direction-of-change forecasts useful for market timing. We attempt to do so in an international sample of developed equity markets, with some success, as assessed by formal probability forecast scoring rules such as the Brier score. An important ingredient is our conditioning not only on conditional mean and variance information, but also conditional skewness and kurtosis information, when forming direction-of-change forecasts.
Note: A previous version of this abstract can be found at: http://ssrn.com/abstract=523582
Keywords: Volatility, variance, skewness, kurtosis, market timing, asset management, asset allocation, portfolio management
JEL Classification: G10, G12
Suggested Citation: Suggested Citation