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New Methods for Inference in Long-Horizon Regressions

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  • Hjalmarsson, Erik

Abstract

I develop new results for long-horizon predictive regressions with overlapping observations. I show that rather than using autocorrelation robust standard errors, the standard t -statistic can simply be divided by the square root of the forecasting horizon to correct for the effects of the overlap in the data. Further, when the regressors are persistent and endogenous, the long-run ordinary least squares (OLS) estimator suffers from the same problems as the short-run OLS estimator, and it is shown how similar corrections and test procedures as those proposed for the short-run case can also be implemented in the long run. An empirical application to stock return predictability shows that, contrary to many popular beliefs, evidence of predictability does not typically become stronger at longer forecasting horizons.

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  • Hjalmarsson, Erik, 2011. "New Methods for Inference in Long-Horizon Regressions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(03), pages 815-839, June.
  • Handle: RePEc:cup:jfinqa:v:46:y:2011:i:03:p:815-839_00
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    Cited by:

    1. Choi, Yongok & Jacewitz, Stefan & Park, Joon Y., 2016. "A reexamination of stock return predictability," Journal of Econometrics, Elsevier, vol. 192(1), pages 168-189.
    2. Toni Beutler, 2012. "Forecasting Exchange Rates with Commodity Convenience Yields," Working Papers 12.03, Swiss National Bank, Study Center Gerzensee.
    3. Phillips, Peter C.B. & Lee, Ji Hyung, 2013. "Predictive regression under various degrees of persistence and robust long-horizon regression," Journal of Econometrics, Elsevier, vol. 177(2), pages 250-264.
    4. Adrian Austin & Swarna Dutt, 2015. "Exchange Rates and Fundamentals: A New Look at the Evidence on Long-Horizon Predictability," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 43(1), pages 147-159, March.
    5. Pozo, Veronica F. & Schroeder, Ted C., 2016. "Evaluating the costs of meat and poultry recalls to food firms using stock returns," Food Policy, Elsevier, vol. 59(C), pages 66-77.
    6. Hjalmarsson, Erik, 2012. "Some curious power properties of long-horizon tests," Finance Research Letters, Elsevier, vol. 9(2), pages 81-91.

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