Arbeitspapier
Long-term investing under uncertain parameter instability
The relationship between excess returns and the dividend price ratio is known to be unstable. However, there is no consensus on the type of instability, i.e. few or many breaks. Differences in parameter instability affect the long-term investor in particular, as misspecification errors are exacerbated as the investment horizon increases. Therefore, we investigate the consequences of different types of break processes for a long-term investor. The break process is inferred with a mixture innovation model using Bayesian methods. This allows us to estimate the break risk and the uncertainty around it. The estimated parameters show substantial instability, with an average break probability of 20.6%. Assuming constant parameters can lead to losses of up to 16.3% in certainty equivalent return for the long-term investor, even if the break probability is small in reality. The costs of ignoring uncertainty regarding the instability are smaller, but non-negligible.
- Sprache
-
Englisch
- Erschienen in
-
Series: Tinbergen Institute Discussion Paper ; No. TI 2023-073/III
- Klassifikation
-
Wirtschaft
Bayesian Analysis: General
Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
Portfolio Choice; Investment Decisions
- Thema
-
Return predictability
parameter instability
mixture innovation model
long-term investing
Bayesian modeling
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Keijsers, Bart
- Ereignis
-
Veröffentlichung
- (wer)
-
Tinbergen Institute
- (wo)
-
Amsterdam and Rotterdam
- (wann)
-
2023
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:41 MEZ
Datenpartner
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Objekttyp
- Arbeitspapier
Beteiligte
- Keijsers, Bart
- Tinbergen Institute
Entstanden
- 2023
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