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Why long horizons? A study of power against persistent alternatives

  • Campbell, John Y.

This paper studies tests of predictability in regressions with a given AR(1) regressor and an asset return dependent variable measured over a short or long horizon. The paper shows that when there is a persistent predictable component in the return, an increase in the horizon may increase the R2 statistic of the regression and the approximate slope of a predictability test. Mone Carlo experiments show that long-horizon regression tests have serious size distortions when asymptotic critical values are used, but some versions of such tests have power advantages remaining after size is corrected.

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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 8 (2001)
Issue (Month): 5 (December)
Pages: 459-491

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Handle: RePEc:eee:empfin:v:8:y:2001:i:5:p:459-491
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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