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Assessing the Power of Long-Horizon Predictive Tests in Models of Bull and Bear Markets

In: Essays in Honor of Peter C. B. Phillips

Listed author(s):
  • Alex Maynard
  • Dongmeng Ren

Abstract We compare the finite sample power of short- and long-horizon tests in nonlinear predictive regression models of regime switching between bull and bear markets, allowing for time varying transition probabilities. As a point of reference, we also provide a similar comparison in a linear predictive regression model without regime switching. Overall, our results do not support the contention of higher power in longer horizon tests in either the linear or nonlinear regime switching models. Nonetheless, it is possible that other plausible nonlinear models provide stronger justification for long-horizon tests.

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This chapter was published in:
  • Yoosoon Chang & Thomas B. Fomby & Joon Y. Park (ed.), 2014. "Essays in Honor of Peter C. B. Phillips," Advances in Econometrics, Emerald Publishing Ltd, volume 33, number aeco.2014.33, August.
  • This item is provided by Emerald Publishing Ltd in its series Advances in Econometrics with number s0731-905320140000033019.
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