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Maximizing Equity Market Sector Predictability in a Bayesian Time Varying Parameter Model* - page 38 / 46

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Table 7

Strategy Performance Summary Annualized geometric returns and Sharpe ratios for a dynamic sector allocation model using 5 different econometric specifications are presented. For each case, total available capital is split evenly between a long portfolio based on the highest predicted sector return and a short portfolio based on the lowest predicted sector return. For the expanding sample strategy, parameters are updated by OLS every period beginning at T = 250 using the full available sample through time t. For the discrete rolling strategy, parameters are updated by OLS every 50 periods for the sample from t-T to t. For the 5yr rolling sample strategy, parameters are updated by OLS weekly using a sample from t-T to t. For the 1yr rolling sample strategy, parameters are updated by OLS weekly using a sample from t-49 to t. For the Bayesian beta strategy, variance parameters are estimated every 50 periods and the beta parameters are updated using the Kalman filter. All results are based on forecasts for period t+1 using parameters and data estimated through period t. The total sample is 678 observations. Estimation results for each strategy begin in period 250 (October 14, 1994). The starting capital level for each strategy is normalized at 100.

1995

17.02%

1996

7.77%

1997

7.67%

1998

25.17%

1999

12.47%

2000

-7.21%

2001

-8.99%

2002

5.60%

14.88%

15.42%

23.92%

8.20%

14.89%

-10.88%

3.54%

7.33%

6.94%

17.62%

11.87%

20.97%

0.92%

13.83%

10.22%

20.07%

8.10%

24.98%

9.54%

18.59%

-20.00%

-0.34%

-2.93%

31.52%

5.23%

11.95%

27.15%

25.50%

-5.14%

3.91%

10.07%

13.42%

Kalman

Year

Expanding

Discrete

1yr

5yr

Sample

Rolling OLS

Rolling OLS

Rolling OLS

Average 6.68%

Geometric Return 2.53%

For Period 1995-2002 8.41%

10.83%

17.95%

1995

1.5

1.59

1.41

2.47

0.85

1996

0.78

1.38

-1.12

0.33

0.65

1997

0.91

0.85

2.01

1.35

2.58

1998

1.84

0.07

1.10

0.94

1.83

1999

0.75

0.51

1.77

0.63

1.26

2000

-0.43

-1.01

-0.01

-0.13

1.62

2001

-0.47

0.28

0.62

1.36

1.36

2002

0.3

-0.27

0.24

0.55

0.73

0.46

Average Sharpe 0.17

Ratios For Period 1995-2002

0.55

0.72

1.24

Kalman

Discrete

1yr

5yr

Rolling OLS

Rolling OLS

Rolling OLS

Year

Expanding Sample

Sharpe Ratios

Per Year

37

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