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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


  • 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.

Suggested Citation

  • Alex Maynard & Dongmeng Ren, 2014. "Assessing the Power of Long-Horizon Predictive Tests in Models of Bull and Bear Markets," Advances in Econometrics,in: Essays in Honor of Peter C. B. Phillips, volume 33, pages 673-711 Emerald Publishing Ltd.
  • Handle: RePEc:eme:aecozz:s0731-905320140000033019

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    More about this item


    Predictive regression; long-horizon regression; regime-switching; nonlinear; stock return predictability; G12; G14; C51; C53; C58;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics


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