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Estimation Bias and Inference in Overlapping Autoregressions: Implications for the Target Zone Literature

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  • Zsolt Darvas

Abstract

Samples with overlapping observations are used for the study of uncovered interest rate parity, the predictability of long run stock returns, and the credibility of exchange rate target zones. This paper quantifies the biases in parameter estimation and size distortions of hypothesis tests of overlapping linear and polynomial autoregressions, which have been used in target zone applications. We show that both estimation bias and size distortions generally depend on the amount of overlap, the sample size, and the autoregressive root of the data generating process. In particular, the estimates are biased in a way that makes it more likely that the predictions of the Bertola-Svensson-model will be supported. Size distortions of various tests also turn out to be substantial even when using a heteroskedasticity and autocorrelation consistent covariance matrix.

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File URL: http://web.uni-corvinus.hu/matkg/working_papers/wp_2007_1_darvas.pdf
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Bibliographic Info

Paper provided by Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest in its series Working Papers with number 0701.

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Length: 35 pages
Date of creation: 27 Feb 2007
Date of revision:
Handle: RePEc:mkg:wpaper:0701

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Related research

Keywords: drift-adjustment method; exchange rate target zone; HAC covariance; overlapping observations; polynomial autoregression; size distortions; small sample bias;

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Cited by:
  1. Zsolt Darvas & Jean Pisani-Ferry, 2011. "The threat of 'currency wars': A European perspective," IEHAS Discussion Papers 1102, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  2. Wagner, Martin, 2012. "The Phillips unit root tests for polynomials of integrated processes," Economics Letters, Elsevier, vol. 114(3), pages 299-303.
  3. Zsolt Darvas, 2011. "Beyond the Crisis: Prospects for Emerging Europe," IEHAS Discussion Papers 1103, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  4. Zsombor Z. Méder & András Simonovits & János Vincze, 2012. "Tax Morale and Tax Evasion: Social Preferences and Bounded Rationality," Working Papers 1202, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.
  5. Daniel Ventosa-Santaulària & Carlos Vladimir Rodríguez-Caballero, 2013. "Polynomial Regressions and Nonsense Inference," Econometrics, MDPI, Open Access Journal, vol. 1(3), pages 236-248, November.
  6. Zsolt Darvas, 2010. "The Case for Reforming Euro Area Entry Criteria," Working Papers 1003, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest.

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