Scandinavian Working Papers in Economics

Working Papers,
Lund University, Department of Economics

No 2001:16: Empirical Probability Distributions of Real Return from Swedish Stock and Bond Portfolios

Andreas Graflund ()
Additional contact information
Andreas Graflund: Department of Economics, Lund University, Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund, Sweden

Abstract: This paper introduces a new non-parametric approach to integrate empirical probability functions of the real return for different investment horizons for five portfolios of Swedish stocks and bonds. In our setting the problem reduces to generating new generalizations from an empirical Markov chain. We find that the stocks yield a real return of about 7.5% and bonds about 3.0%. Our results suggest that an investor ought to avoid bonds in the long run. Finally if the investors goal is to minimize the risk of capital destruction the preferable long-run passive portfolio is a mix of bonds and stocks.

Keywords: Empirical distribution; stock returns; bond returns; real return; markovian bootstrap; MCMC

JEL-codes: C11; C15; G10; G11

25 pages, First version: September 20, 2001. Revised: January 29, 2002. Earlier revisions: January 30, 2002.

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WP01_16.pdf PDF-file

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