Advanced Search
MyIDEAS: Login to save this paper or follow this series

Why Long Horizons? A Study of Power Against Persistent Alternatives

Contents:

Author Info

  • Campbell, John

Abstract

This paper studies tests of predictability in regressions with a given AR(1) regressor and an asset return dependent variable measured over a short or long horizon. The paper shows that when there is a persistent predictable component in the return, an increase in the horizon may increase the R2 statistic of the regression and the approximate slope of a predictability test. Monte Carlo experiments show that long-horizon regression tests have serious size distortions when asymptotic critical values are used, but some versions of such tests have power advantages remaining after size is corrected.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://dash.harvard.edu/bitstream/handle/1/3196341/campbellnber_longhorizons.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3196341.

as in new window
Length:
Date of creation: 2001
Date of revision:
Publication status: Published in Journal of Empirical Finance
Handle: RePEc:hrv:faseco:3196341

Contact details of provider:
Postal: Littauer Center, Cambridge, MA 02138
Phone: 617-495-2144
Fax: 617-495-7730
Web page: http://www.economics.harvard.edu/
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers, National Bureau of Economic Research, Inc 2168, National Bureau of Economic Research, Inc.
  2. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, Elsevier, vol. 54(3), pages 375-421, December.
  3. Lo, Andrew W. & MacKinlay, A. Craig, 1989. "The size and power of the variance ratio test in finite samples : A Monte Carlo investigation," Journal of Econometrics, Elsevier, Elsevier, vol. 40(2), pages 203-238, February.
  4. Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 812, Cowles Foundation for Research in Economics, Yale University.
  5. Smith, T. & Richardson, M., 1991. "Robust Power Calculations With tests for Serial Correlation in stock Returns," Weiss Center Working Papers, Wharton School - Weiss Center for International Financial Research 12-91, Wharton School - Weiss Center for International Financial Research.
  6. Campbell, John & Shiller, Robert, 1988. "Stock Prices, Earnings, and Expected Dividends," Scholarly Articles, Harvard University Department of Economics 3224293, Harvard University Department of Economics.
  7. Frederic S. Mishkin, 1988. "What Does the Term Structure Tell Us About Future Inflation?," NBER Working Papers, National Bureau of Economic Research, Inc 2626, National Bureau of Economic Research, Inc.
  8. Fama, Eugene F., 1990. "Term-structure forecasts of interest rates, inflation and real returns," Journal of Monetary Economics, Elsevier, Elsevier, vol. 25(1), pages 59-76, January.
  9. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, Econometric Society, vol. 49(3), pages 555-74, May.
  10. Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, Elsevier, vol. 25(1), pages 23-49, November.
  11. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(3), pages 495-514, May.
  12. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 27-59, October.
  13. Robert F. Stambaugh, . "Estimating Conditional Expectations When Volatility Fluctuates," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 17-93, Wharton School Rodney L. White Center for Financial Research.
  14. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  15. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 101(405), pages 157-79, March.
  16. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 680-92, September.
  17. Mishkin, Frederic S, 1990. "The Information in the Longer Maturity Term Structure about Future Inflation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 105(3), pages 815-28, August.
  18. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, American Economic Association, vol. 85(1), pages 201-18, March.
  19. Faust, Jon, 1992. "When Are Variance Ratio Tests for Serial Dependence Optimal?," Econometrica, Econometric Society, Econometric Society, vol. 60(5), pages 1215-26, September.
  20. N. Gregory Mankiw & Matthew D. Shapiro, 1985. "Do We Reject Too Often? Small Sample Properties of Tests of Rational Expectations Models," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0051, National Bureau of Economic Research, Inc.
  21. Matthew Richardson & James H. Stock, 1990. "Drawing Inferences From Statistics Based on Multi-Year Asset Returns," NBER Working Papers, National Bureau of Economic Research, Inc 3335, National Bureau of Economic Research, Inc.
  22. Goetzmann, W.N., 1990. "Testing The Predictive Power Of Dividend Yields," Papers, Columbia - Graduate School of Business fb-_90-12, Columbia - Graduate School of Business.
  23. Matthew Richardson & Tom Smith, . "Robust Power Calculations with Tests for Serial Correlation in Stock Returns," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 12-91, Wharton School Rodney L. White Center for Financial Research.
  24. John H. Cochrane, 1991. "Volatility Tests and Efficient Markets: A Review Essay," NBER Working Papers, National Bureau of Economic Research, Inc 3591, National Bureau of Economic Research, Inc.
  25. Richardson, Matthew & Smith, Tom, 1991. "Tests of Financial Models in the Presence of Overlapping Observations," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 4(2), pages 227-54.
  26. Scott, Louis O, 1985. "The Present Value Model of Stock Prices: Regression Tests and Monte Carlo Results," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 67(4), pages 599-605, November.
  27. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 421-36, June.
  28. Nelson, Charles R & Kim, Myung J, 1993. " Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, American Finance Association, vol. 48(2), pages 641-61, June.
  29. Geweke, John, 1981. "The Approximate Slopes of Econometric Tests," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1427-42, November.
  30. Cochrane, John H, 1988. "How Big Is the Random Walk in GNP?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(5), pages 893-920, October.
  31. Engle, Robert F., 1984. "Wald, likelihood ratio, and Lagrange multiplier tests in econometrics," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 13, pages 775-826 Elsevier.
  32. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
  33. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, Elsevier, vol. 22(1), pages 3-25, October.
  34. Summers, Lawrence H, 1986. " Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, American Finance Association, vol. 41(3), pages 591-601, July.
  35. Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-86.
  36. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, Econometric Society, vol. 50(4), pages 1029-54, July.
  37. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers, National Bureau of Economic Research, Inc 4108, National Bureau of Economic Research, Inc.
  38. Jegadeesh, Narasimhan, 1991. " Seasonality in Stock Price Mean Reversion: Evidence from the U.S. and the U.K," Journal of Finance, American Finance Association, American Finance Association, vol. 46(4), pages 1427-44, September.
  39. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 246-73, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hrv:faseco:3196341. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ben Steinberg).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.