Diss. Stockholm : Handelshögsk.

The purpose of this thesis is to explore the possibilities and advantages of describing macroeconomic relationships with a certain well-defined class of parametric nonlinear econometric models, called smooth transition regressions (STR). An STR model is a flexible nonlinear specification with a continuum of regimes. It is locally linear transitions from one extreme regime to another are determined by a function of a continuous variable, the transition variable.The thesis consists of four essays and the macroeconomic relationships that are considered are: Consumption, Money Demand and the Phillips Curve. The essays of this dissertation emphasise the importance of allowing for a flexible functional form when dealing with macroeconomic relationships. / Diss. Stockholm : Handelshögsk.

This thesis, “Empirical Asset Pricing and Investment Strategies”, examines a number of topics related to portfolio choice, asset pricing, and strategic and tactical asset allocation. The first two papers treat the predictability of asset returns. Since at least the mid-1980s until quite recently, the conventional wisdom has been that it is possible to predict the return on, for example, an index of stocks. However, a series of recent papers have challenged this conventional wisdom. I answer this challenge and show that it is possible to predict returns if structural changes in the underlying economy are taken into account. The third paper examines the comovement between stocks and bonds. I show how it is possible to improve the composition of a portfolio consisting of these two asset classes by taking into account how the comovement changes over time. All three papers are self-contained and can therefore be read in any order. The first paper is entitled “Structural Breaks in Asset Return Predictability: Can They Be Explained?” Here I investigate whether predictability has changed over time and, if so, whether it is possible to tie the change to any underlying economic variables. Dividend yield and the short interest rate are often used jointly as instruments to predict the return on stocks, but several researchers present evidence that the relation has undergone a structural break. I use a model that extends the conventional structural breaks models to allow both for smooth transitions from one state to another (with a break as a special case), and for transitions that depend on a state variable other than time. The latter allows me to directly test whether, for example, the business cycle influences how the instruments predict returns. The results suggest that this is not the case. However, I do find evidence of a structural change primarily in how the instruments predict returns for large firms. The change differs from a break in that it appears to be an extended non-linear transition during the period 1993—1997. After the change, the short rate does not predict returns at all. Dividend yield, on the other hand, is strongly significant, and the return has become more sensitive to it. In the second paper, “Restoring the Predictability of Equity Returns,” I take another perspective on predictability and structural shifts. Several recent papers have questioned the predictability of equity returns, potentially implying serious negative consequences for investment decision-making. With return data including the 1990s, variables that previously predicted returns, such as the dividend yield, are no longer significant and results of out-of-sample tests are often weak. A possible reason is that the underlying structure of the economy has changed. I use an econometric model that allows for regime shifts over time as well as due to changes in a state variable, in this case the price-earnings ratio. This makes it possible to separate influences from these two sources and to determine whether one or both sources have affected return predictability. The results indicate that, first, a structural change occurred during the 1990s, and, second, that the unusually high level of price earnings in the late 1990s and early 2000s temporarily affected predictability at the 12-month horizon. In the third paper, “Coupling and Decoupling: Changing Relations between Stock and Bond Market Returns,” I investigate stock-bond comovement. The correlation between stocks and bonds has changed dramatically over the last ten years, introducing a new type of risk for portfolio managers, namely, correlation risk. I use GARCH estimates of stock volatility, simple regressions, and regime-switching econometric models to assess whether level of volatility, or changes in volatility, can be used to explain some of the changes in comovement in seven different countries. As regards volatility level, strong support is found in almost all countries to suggest that high volatility predicts lower, or negative, comovement. I argue that this can be evidence of a market-timing type of behavior. As for changes in volatility, the results are more mixed. Only for the U.S. market do I find strong support to conclude that large changes tend to coincide with lower, or negative, comovement. This could be evidence of a flight-to-quality (or cross-market hedging) type of behavior. / <p>Diss. Stockholm : Handelshögskolan, 2007</p>