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

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  • Michael Cooper

    (Purdue University)

  • Huseyin Gulen

    (Virginia Tech)

Abstract

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.

Suggested Citation

  • Michael Cooper & Huseyin Gulen, 2006. "Is Time-Series-Based Predictability Evident in Real Time?," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1263-1292, May.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:3:p:1263-1292
    DOI: 10.1086/500676
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    3. Campbell R. Harvey & Yan Liu & Heqing Zhu, 2014. ". . . and the Cross-Section of Expected Returns," NBER Working Papers 20592, National Bureau of Economic Research, Inc.
    4. Dooruj Rambaccussing, 2011. "Do Mean Reverting based trading strategies outperform Buy and Hold?," Working Papers 1113, Department of Applied Economics II, Universidad de Valencia.
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