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Does the Absence of Cointegration Explain the Typical Findings in Long Horizon Regression?

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Author Info
van Dijk, D.
Berben, R.P.

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Abstract

One of the stylized facts in financial and international economics is that of increasing predictability of variables such as exchange rates and stock returns at longer horizons. This fact is based upon applications of long horizon regressions, from which the typical findings are that the point estimates of the regression parameter, the associated t-statistic, and the regression R2 all tend to increase as the horizon increases. Such long horizon regression analyses implicitly assume the existence of cointegration between the variables involved. In this paper, we investigate the consequences of dropping this assumption. In particular, we look upon the long horizon regression as a conditional error-correction model and interpret the test for long horizon predictability as a single equation test for cointegration.

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Publisher Info
Paper provided by Erasmus University of Rotterdam - Econometric Institute in its series Papers with number 9814/a.

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Length: 25 pages
Date of creation: 1998
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Handle: RePEc:fth:erroem:9814/a

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Related research
Keywords: REGRESSION ANALYSIS ; COINTEGRATION ; ECONOMIC MODELS ; EXCHANGE RATE ; FORECASTS;

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Find related papers by JEL classification:
C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
F31 - International Economics - - International Finance - - - Foreign Exchange
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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  32. repec:fth:michin:401 is not listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kilian, Lutz, 1999. "Exchange Rates and Monetary Fundamentals: What Do We Learn from Long-Horizon Regressions?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 491-510, Sept.-Oct. [Downloadable!]
  2. Lutz Kilian & Atsushi Inoue, 2002. "In-Sample or out-of-sample tests of predictability: which one should we use?," Working Paper Series 195, European Central Bank. [Downloadable!]
    Other versions:
  3. Nelson C. Mark & Donggyu Sul, 2004. "The Use of Predictive Regressions at Alternative Horizons in Finance and Economics," Finance 0409032, EconWPA. [Downloadable!]
    Other versions:
  4. Lutz Kilian & Mark P. Taylor, 2001. "Why is it so difficult to beat the Random Walk Forecast of Exchange Rates?," Tinbergen Institute Discussion Papers 01-031/4, Tinbergen Institute. [Downloadable!]
    Other versions:
  5. Lucio Sarno, 2003. "Nonlinear Exchange Rate Models: A Selective Overview," IMF Working Papers 03/111, International Monetary Fund. [Downloadable!]
  6. Nelson Mark & Donggyu Sul, 1998. "Norminal Exchange Rates and Monetary Fundamentals: Evidence from a Small Post-Bretton Woods Panel," Working Papers 98-19, Ohio State University, Department of Economics. [Downloadable!]
    Other versions:
  7. A. Carriero & G. Kapetanios & M. Marcellino, 2008. "Forecasting Exchange Rates with a Large Bayesian VAR," Economics Working Papers ECO2008/33, European University Institute. [Downloadable!]
    Other versions:
  8. Christopher J. Neely & Lucio Sarno, 2002. "How well do monetary fundamentals forecast exchange rates?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 51-74. [Downloadable!]
    Other versions:
  9. Mark E. Wohar & David E. Rapach, 2005. "Valuation ratios and long-horizon stock price predictability," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(3), pages 327-344. [Downloadable!]
  10. Westerlund, Joakim & Basher, Syed A., 2006. "Can Panel Data Really Improve the Predictability of the Monetary Exchange Rate Model?," MPRA Paper 1229, University Library of Munich, Germany. [Downloadable!]
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  11. Carlos Felipe Lopez Suarez & Jose Antonio Rodriguez Lopez, 2008. "Nonlinear Exchange Rate Predictability," Working Papers 080911, University of California-Irvine, Department of Economics. [Downloadable!]
  12. Jon Faust & John H. Rogers & Jonathan H. Wright, 2001. "Exchange rate forecasting: the errors we've really made," International Finance Discussion Papers 714, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
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