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Is Time-Series-Based Predictability Evident in Real Time?

  • Michael Cooper

    (Purdue University)

  • Huseyin Gulen

    (Virginia Tech)

Registered author(s):

    We show that out-of-sample tests used in the time-series predictability literature may suffer from test size problems related to the common practice of exogenous specification of critical parameters, such as the choice of predictive variables, traded assets, and in-sample estimation periods. We perform specification searches across these parameters and find that rejections of the null hypothesis of no predictability are very sensitive to minor variations in parameter specification. We perform simulations to determine if the observed predictability in the data is real. The simulations suggest that much of the literature's out-of-sample evidence of time-series-based predictability is consistent with data snooping.

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    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 3 (May)
    Pages: 1263-1292

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1263-1292
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