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Predictive Regressions: A Reduced-Bias Estimation Method

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Author Info
Yakov Amihud (New York University)
Clifford Hurvich (New York University)

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Abstract

Standard predictive regressions produce biased coefficient estimates in small samples when the regressors are Gaussian first-order autoregressive with errors that are correlated with the error series of the dependent variable; see Stambaugh (1999) for the single-regressor model. This paper proposes a direct and convenient method to obtain reduced-bias estimators for single and multiple regressor models by employing an augmented regression, adding a proxy for the errors in the autoregressive model. We derive bias expressions for both the ordinary least squares and our reduced-bias estimated coefficients. For the standard errors of the estimated predictive coefficients we develop a heuristic estimator which performs well in simulations, for both the single-predictor model and an important specification of the multiple- predictor model. The effectiveness of our method is demonstrated by simulations and by empirical estimates of common predictive models in finance. Our empirical results show that some of the predictive variables that were significant under ordinary least squares become insignificant under our estimation procedure.

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Paper provided by EconWPA in its series Econometrics with number 0412008.

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Length: 63 pages
Date of creation: 15 Dec 2004
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Handle: RePEc:wpa:wuwpem:0412008

Note: Type of Document - pdf; pages: 63
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Related research
Keywords: Stock Returns; Dividend Yields; Autoregressive Models;

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Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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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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  14. Amihud, Yakov, 2002. "Illiquidity and stock returns: cross-section and time-series effects," Journal of Financial Markets, Elsevier, vol. 5(1), pages 31-56, January. [Downloadable!] (restricted)
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    Other versions:
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. Tim Bollerslev & Michael Gibson & Hao Zhou, 2007. "Dynamic Estimation of Volatility Risk Premia and Investor Risk Aversion from Option-Implied and Realized Volatilities," CREATES Research Papers 2007-16, School of Economics and Management, University of Aarhus. [Downloadable!]
    Other versions:
  2. Alex Maynard & Katsumi Shimotsu, 2007. "Covariance-based orthogonality tests for regressors with unknown persistence," Working Papers 1122, Queen's University, Department of Economics. [Downloadable!]
    Other versions:
  3. Schmeling, Maik, 2008. "Investor sentiment and stock returns: Some international evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-407, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  4. David Rey, 2005. "Market Timing And Model Uncertainty: An Exploratory Study For The Swiss Stock Market," Financial Markets and Portfolio Management, Springer, vol. 19(3), pages 239-260, October. [Downloadable!] (restricted)
  5. Schrimpf, Andreas, 2008. "International Stock Return Predictability Under Model Uncertainty," ZEW Discussion Papers 08-048, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
  6. Malcolm P. Baker & Ryan Taliaferro & Jeffrey Wurgler, 2004. "Pseudo Market Timing and Predictive Regressions," NBER Working Papers 10823, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Belén Nieto & Gonzalo Rubio, 2007. "Measuring Time-Varying Economic Fears with Consumption-Based Stochastic Discount Factors," Economics Working Papers 1029, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2007. [Downloadable!]
  8. Ai Deng, 2005. "Understanding Spurious Regression in Financial Economics," Boston University - Department of Economics - Working Papers Series WP2005-048, Boston University - Department of Economics. [Downloadable!]
  9. Erik Hjalmarsson, 2008. "Predicting global stock returns," International Finance Discussion Papers 933, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  10. Gueorgui I. Kolev, 2008. "Forecasting aggregate stock returns using the number of initial public offerings as a predictor," Economics Bulletin, Economics Bulletin, vol. 7(13), pages 1-8. [Downloadable!]
  11. Belén Nieto & Rosa Rodríguez, 2006. "The Consumption/Wealth and Book/Market Ratios in a Dynamic Asset Pricing Contex," Spanish Economic Review, Springer, vol. 8(3), pages 199-226, September. [Downloadable!] (restricted)
  12. Benjamin Chiquoine & Erik Hjalmarsson, 2008. "Jackknifing stock return predictions," International Finance Discussion Papers 932, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  13. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-337, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
    Other versions:
  14. Yakov Amihud & Clifford Hurvich & Yi Wang, 2004. "Hypothesis Testing in Predictive Regressions," Finance 0412022, EconWPA. [Downloadable!]
  15. Malcolm Baker & Robin Greenwood & Jeffrey Wurgler, 2008. "Catering Through Nominal Share Prices," NBER Working Papers 13762, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Jacob Boudoukh & Matthew Richardson & Robert Whitelaw, 2005. "The Myth of Long-Horizon Predictability," NBER Working Papers 11841, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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