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Finite-sample properties of the Campbell and Thompson out-of-sample R2

Author

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  • Zevallos, Mauricio
  • Rubesam, Alexandre

Abstract

We study finite-sample properties of the Campbell and Thompson (2007) out-of-sample R2 statistic (ROOS2). We derive analytical approximations for its expected value under rolling and expanding window estimation. ROOS2 is downward biased relative to the true level of predictability, and negative values of ROOS2 can arise frequently under weak predictability. Simulations confirm the accuracy of the approximations and describe the full distribution of ROOS2 under different data generating processes. We discuss an empirical application to equity premium predictors.

Suggested Citation

  • Zevallos, Mauricio & Rubesam, Alexandre, 2026. "Finite-sample properties of the Campbell and Thompson out-of-sample R2," Economics Letters, Elsevier, vol. 265(C).
    • Handle: RePEc:eee:ecolet:v:265:y:2026:i:c:s0165176526002053
    DOI: 10.1016/j.econlet.2026.113011
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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