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Testing for predictability in panels of any time series dimension

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  • Westerlund, Joakim
  • Narayan, Paresh

Abstract

The few panel data tests for the predictability of returns that exist are based on the prerequisite that both the number of time series observations, T, and the number of cross-section units, N, are large. As a result, it is impossible to apply these tests to stock markets, where lengthy time series of data are scarce. In response to this, the current paper develops a new test for predictability in panels where N is large and T≥2 can be either small or large, or indeed anything in between. This consideration represents an advancement relative to the usual large-N and large-T requirement. The new test is also very general, especially when it comes to allowable predictors, and is easy to implement. As an illustration, we consider the Chinese stock market, for which data are available for only 17 years, but where the number of firms is relatively large, 160.

Suggested Citation

  • Westerlund, Joakim & Narayan, Paresh, 2016. "Testing for predictability in panels of any time series dimension," International Journal of Forecasting, Elsevier, vol. 32(4), pages 1162-1177.
    • Handle: RePEc:eee:intfor:v:32:y:2016:i:4:p:1162-1177
    DOI: 10.1016/j.ijforecast.2016.02.009
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