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Regime Specific Predictability in Predictive Regressions

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  • Gonzalo, Jesus
  • Pitarakis, Jean-Yves

Abstract

Predictive regressions are linear specifications linking a noisy variable such as stock returns to past values of a more persistent regressor with the aim of assessing the presence of predictability. Key complications that arise are the potential presence of endogeneity and the poor adequacy of asymptotic approximations. In this paper we develop tests for uncovering the presence of predictability in such models when the strength or direction of predictability may alternate across different economically meaningful episodes. An empirical application reconsiders the Dividend Yield based return predictability and documents a strong predictability that is countercyclical, occurring solely during bad economic times

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29190.

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Date of creation: Dec 2010
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Handle: RePEc:pra:mprapa:29190

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Keywords: Endogeneity; Persistence; Return Predictability; Threshold Models;

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Citations

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Cited by:
  1. Vanessa Berenguer Rico & Jesús Gonzalo, 2013. "Co-summability from linear to non-linear cointegration," Economics Working Papers we1312, Universidad Carlos III, Departamento de Economía.
  2. Barbara Rossi, 2011. "Advances in Forecasting Under Instability," Working Papers 11-20, Duke University, Department of Economics.
  3. Biqing Cai & Jiti Gao, 2013. "Hermite Series Estimation in Nonlinear Cointegrating Models," Monash Econometrics and Business Statistics Working Papers 17/13, Monash University, Department of Econometrics and Business Statistics.
  4. Haiqiang Chen, 2013. "Robust Estimation and Inference for Threshold Models with Integrated Regressors," SFB 649 Discussion Papers SFB649DP2013-034, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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