Stock return predictability and stationarity of dividend yield

This paper first investigates the stationarity of dividend yield and then analyzes the predictive ability of the adjusted dividend yield which removes structural changes and high persistence characteristics. Empirical results have found that the dividend yield follows a mean-reverting process in each regime, and the convergence speed depends on the mean and variance. Moreover, the dividend yield is also global stationary. Finally, the adjusted dividend yield can predict future stock returns, and its predictive ability is time-invariant.mean reversion, regime switching, stationarity, stock return predictability

In the Shadow of the United States: The International Transmission Effect of Asset Returns

We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor.currency board, fixed nominal exchange rate, international transmission mechanism, hierarchical Markov regime-switching model, vector autoregressive model

Monetary Policy, Term Structure and Asset Return: Comparing REIT, Housing and Stock

This paper confirms that a regime-switching model out-performs a linear VAR model in terms of understanding the system dynamics of asset returns. Impulse responses of REIT returns to either the federal funds rate or the interest rate spread are much larger initially but less persistent. Furthermore, the term structure acts as an amplifier of the impulse response for REIT return, a stabilizer for the housing counterpart under some regime, and, perhaps surprisingly, almost no role for the stock return. In contrast, GDP growth has very marginal effect in the impulse response for all assets.monetary policy; yield curve; REITs; house prices; Markov Regime Switching

Losing Track of the Asset Markets : The Case of Housing and Stock

This paper revisits the relationships among macroeconomic variables and asset returns. Based on recent developments in econometrics, we categorize competing models of asset returns into different “Equivalence Predictive Power Classes” (EPPC). During the pre-crisis period (1975-2005), some models that emphasize imperfect capital markets outperform an AR(1) for the forecast of housing returns. After 2006, a model that includes both an external finance premium (EFP) and the TED spread “learns and adjusts” faster than competing models. Models that encompass GDP experience a significant decay in predictive power. We also demonstrate that a simulation-based approach is complementary to the EPPC methodology

Wealth Effects on Consumption in Taiwan: An Application of the Multivariate Markov Regime-Switching Model

“The buffer stock theory” derived from the intertemporal utility maximization predicts that an increase in wealth will dampen the motive for precautionary savings and therefore reduce consumption’s over-sensitivity with respect to income changes. Since over the last forty years Taiwan has more than once experienced sharp rises in the values of stock market and real estate, the goal of this paper is to examine whether the prediction of the buffer stock theory holds in Taiwan. The empirical model we propose is a trivariate two-state Markov regime-switching model that is originated from Euler equation for consumption growth. The three macro variables we consider are the real non-durable good consumption growth, the real GDP growth, and the real growth in stock market total value. It is assumed that these three variables are subject to the same Markov regime-switching variable in determining their two states. Our empirical results using Taiwan’s quarterly data suggest a high growth state and a low growth one: the former includes 1973Q3, 1973Q4, 1978Q3, 1987Q2 – 1990Q1, 1991Q2, and 1991Q3. The main finding of this paper is as follows: It is indeed the precautionary savings motive that causes the aggregate consumption in Taiwan to be overly sensitive to income changes, just as the buffer stock theory has predicted. When wealth in Taiwan, symbolized by the values of stock market, increased substantially under the high growth state, consumers’ precautionary savings motive weakened and the over-sensitivity phenomenon to a large extent disappeared.消費過度敏感現象, 預防性儲蓄動機, 財富效果, 三變量結構轉換模型

The Dynamics of Housing Returns in Singapore: How Important are the International Transmission Mechanisms?

This paper studies the dynamics of housing returns in Singapore. We first extract the movements of Singapore's economic aggregates that are free from foreign (U.S. and rest of the world) factors, and then examine the determinants of its housing returns. We find that both the domestic variables (such as GDP growth rate, volume of international trade, and exchange rate) and U.S. variables (such as the Federal Fund Rate and the External Finance Premium) are important during the boom regime. The bust regime is very different. Directions for future research are discussed

The Dynamics of Housing Returns in Singapore: How Important are the International Transmission Mechanisms?

This paper studies the dynamics of housing returns in Singapore. We first extract the movements of Singapore's economic aggregates that are free from foreign (U.S. and rest of the world) factors, and then examine the determinants of its housing returns. We find that both the domestic variables (such as GDP growth rate, volume of international trade, and exchange rate) and U.S. variables (such as the Federal Fund Rate and the External Finance Premium) are important during the boom regime. The bust regime is very different. Directions for future research are discussed

Monetary Policy, Term Structure and Asset Return: Comparing REIT, Housing and Stock

This paper confirms that a regime-switching model out-performs a linear VAR model in terms of understanding the system dynamics of asset returns. Impulse responses of REIT returns to either the federal funds rate or the interest rate spread are much larger initially but less persistent. Furthermore, the term structure acts as an amplifier of the impulse response for REIT return, a stabilizer for the housing counterpart under some regime, and, perhaps surprisingly, almost no role for the stock return. In contrast, GDP growth has very marginal effect in the impulse response for all assets

In the Shadow of the United States: The International Transmission Effect of Asset Returns

We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor

In the Shadow of the United States: The International Transmission Effect of Asset Returns

We examine how the fluctuations in financial and housing markets in U.S. affect the asset returns and GDP in Hong Kong. In contrast to the results from linear specifications, which concludes that the U.S. and Hong Kong are virtually delinked in terms of the asset markets, our regime-switching models indicate that the unexpected shock of US stock returns, followed by the TED spread, has the most significant effect on HK asset returns and GDP, typically in the regime with high return and low volatility. For the in-sample one-step-ahead forecasting, US Term spread stands out to be the best predictor