Parameter Uncertainty, Financial Turbulence and Aggregate Stock Returns
2020-02-05·
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0 min read
Sebastian Stöckl
Preprint
Cite
Poster
Frontiers of Factor Investing 2020*
Cologne Colloquium on Financial Markets 2020*
Asset Allocation under Parameter Uncertainty 2017
Workshop of the AWG 2017
DGF 2017
FMA Europe 2017
Australasian Finance & Banking 2016
SFA 2015
World Finance 2015
UBC Sauder (Vancouver)
HSG (St. Gallen)
LOg cumulative wealth of various investment strategies, including buy & hold, based on SII as well as parameter uncertainty.Abstract
In this paper, we develop a novel, intuitive and objective measure of time-varying parameter uncertainty (PU) based on a simple statistical test. Investors who are averse to parameter uncertainty will react to elevated levels of PU by withdrawing from the market and causing prices to fall, a behavior that is well described by the model of portfolio selection with parameter uncertainty of Garlappi et al. (2007). We show that this model in combination with our measure, outperforms all other tested variables including the strongest known predictor to date. Additionally, it is the only predictor that fulfills all criteria generally expected from a stable predictor of the equity premium. All our results are statistically and economically significant and robust to a large variety of different specifications.
Type
Publication
Working Paper (University of Liechtenstein)
