Finally, in the spirit of Fleming et al. (2001), Campbell and Thompson (2008), Welch and Goyal (2008), and Della Corte et al. (2009), we evaluate the economic value of the DFPM in international stock markets. Specifically, we assume that HKI-272 a mean–variance investor allocates his/her capital in a portfolio constructed of risky stocks and the one-month risk-free Treasury bill. The average utility gain is the difference in certainty equivalent return between two competing investing strategies: the DFPM strategy and the strategy based on other competing models. Empirically, our results reveal that the DFPM consistently delivers higher economic value in asset allocation in all five markets, and in the U.S. market as well, suggesting that taking into account the dynamic feature of stock returns is economically meaningful.
The remainder of continuous variation paper is organized as follows. Section 2 presents the DFPM model. Section 3 discusses data. This section also reports the estimation results of the DFPM model. Section 4 conducts the in-sample testing of asset-pricing models and reports the comparative results. Section 5 conducts the out-of-sample forecasting exercise. In Section 6, we evaluate the economic value of the DFPM. Section 7 concludes the paper.