Nonlinear Financial Econometrics: Markov Switching Models, by Greg N. Gregoriou

By Greg N. Gregoriou

This e-book proposes new the right way to price fairness and version the Markowitz effective frontier utilizing Markov switching types and supply new facts and suggestions to trap the endurance saw in inventory returns throughout built and rising markets.

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This means that the now classical, Markowitz-style mean-variance recipes offered in most textbooks would be correct and the investor ought to 21 GREGORIOU-3: “CHAP02” — 2010/11/10 — 21:37 — PAGE 21 — #1 22 Massimo Guidolin and Federica Ria choose optimal portfolio weights on the basis of simple, naive historical estimates of means, variance, and covariances. If. 2 in this chapter – required by her acknowledging this state-dependence. The issue of whether non-linear predictability patterns may be exploitable for dynamic asset allocation purposes is an important and much researched one.

See text for details. Markov processes. It would be also interesting to assess whether it is possible to derive implications for optimal dividend payout policy from the Markov assumption. The generalized Gordon model we have derived is a moment condition. This suggests testing the present value model directly with moment-based tests such as the GMM J-statistic. A rejection of the moment condition implies there is a systematic departure of the price from its value. For example, the equity premium puzzle can be derived directly without appeal to logs or Normality.

Economically, this means that dividends must grow more slowly than the discount rate (on average). Since observed prices are finite, one might say we infer that this holds. We summarize the result as follows. Proposition 2. If there are no arbitrage opportunities, the value of an asset with payments {dt } is given by pt = 1 − An equivalent statement of the result is pt = 1 − Et −1 gt+1 dt 1 + rt+1 Et dt+1 mt+1 −1 dt . 14) where gt +1 = dt +1 /dt is the dividend growth rate and rt +1 is the time t to time t + 1 discount rate.

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