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Predictive regression with order-p autoregressive predictors

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  • Amihud, Yakov
  • Hurvich, Clifford M.
  • Wang, Yi

Abstract

Studies of predictive regressions analyze the case where yt is predicted by xt - 1 with xt being first-order autoregressive, AR(1). Under some conditions, the OLS-estimated predictive coefficient is known to be biased. We analyze a predictive model where yt is predicted by xt - 1, xt - 2,... xt - p with xt being autoregressive of order p, AR(p) with p > 1. We develop a generalized augmented regression method that produces a reduced-bias point estimate of the predictive coefficients and derive an appropriate hypothesis testing procedure. We apply our method to the prediction of quarterly stock returns by dividend yield, which is apparently AR(2). Using our method results in the AR(2) predictor series having insignificant effect, although under OLS, or the commonly assumed AR(1) structure, the predictive model is significant. We also generalize our method to the case of multiple AR(p) predictors.

Suggested Citation

  • Amihud, Yakov & Hurvich, Clifford M. & Wang, Yi, 2010. "Predictive regression with order-p autoregressive predictors," Journal of Empirical Finance, Elsevier, vol. 17(3), pages 513-525, June.
  • Handle: RePEc:eee:empfin:v:17:y:2010:i:3:p:513-525
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Charles, Amelie & Darne, Olivier & Kim, Jae, 2016. "Stock Return Predictability: Evaluation based on Prediction Intervals," MPRA Paper 70143, University Library of Munich, Germany.
    2. Lorenzo Camponovo & Olivier Scaillet & Fabio Trojani, 2016. "Predictability Hidden by Anomalous Observations," Papers 1612.05072, arXiv.org.
    3. Kurozumi, Eiji & Aono, Kohei, 2013. "Estimation And Inference In Predictive Regressions," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 54(2), pages 231-250, December.
    4. Peter C.B. Phillips & Ye Chen, "undated". "Restricted Likelihood Ratio Tests in Predictive Regression," Cowles Foundation Discussion Papers 1968, Cowles Foundation for Research in Economics, Yale University.
    5. Engsted, Tom & Pedersen, Thomas Q., 2012. "Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model," Journal of Empirical Finance, Elsevier, vol. 19(2), pages 241-253.
    6. Kim, Jae H., 2014. "Testing for parameter restrictions in a stationary VAR model: A bootstrap alternative," Economic Modelling, Elsevier, vol. 41(C), pages 267-273.
    7. Paulo M.M. Rodrigues & Matei Demetrescu, 2016. "Residual-augmented IVX predictive regression," Working Papers w201605, Banco de Portugal, Economics and Research Department.
    8. Charles, Amélie & Darné, Olivier & Kim, Jae H., 2017. "International stock return predictability: Evidence from new statistical tests," International Review of Financial Analysis, Elsevier, vol. 54(C), pages 97-113.

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