Direction-of-Change Forecasts Based on Conditional Variance, Skewness and Kurtosis Dynamics: International Evidence

Anthony S. Tay
Peter F. Christoffersen
Francis X. Diebold
Roberto S. Mariano
Yiu Kuen Tse
Paper No. 15-2007
JEL codes: 
Recent theoretical work has revealed a direct connection between asset return volatility forecastability and asset return sign forecastability. This suggests that the pervasive volatility forecastability in equity returns could, via induced sign forecastability, be used to produce direction-of change forecasts useful for market timing. We attempt to do so in an international sample of developed equity markets, with some success, as assessed by formal probability forecast scoring rules such as the Brier score. An important ingredient is our conditioning not only on conditional mean and variance information, but also conditional skewness and kurtosis information, when forming direction-of-change forecasts.