Bagging Weak Predictors
Relations between economic variables can often not be exploited for forecasting, suggesting that predictors are weak in the sense that estimation uncertainty is larger than bias from ignoring the relation. In this paper, we propose a novel bagging predictor designed for such weak predictor variables. The predictor is based on a test for finitesample predictive ability. Our predictor shrinks the OLS estimate not to zero, but towards the null of the test which equates squared bias with estimation variance. We derive the asymptotic distribution and show that the predictor can substantially lower the MSE compared to standard t-test bagging. An asymptotic shrinkage representation for the predictor is provided that simplifies computation of the estimator. Monte Carlo simulations show that the predictor works well in small samples. In the empirical application, we find that the new predictor works well for inflation forecasts.
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- Pettenuzzo, Davide & Timmermann, Allan & Valkanov, Rossen, 2014.
"Forecasting stock returns under economic constraints,"
Journal of Financial Economics,
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- Pettenuzzo, Davide & Timmermann, Allan G & Valkanov, Rossen, 2013. "Forecasting Stock Returns under Economic Constraints," CEPR Discussion Papers 9377, C.E.P.R. Discussion Papers.
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- John Y. Campbell & Samuel B. Thompson, 2008. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1509-1531, July.
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- Todd E. Clark & Michael W. McCracken, 2009. "In-sample tests of predictive ability: a new approach," Research Working Paper RWP 09-10, Federal Reserve Bank of Kansas City.
- Todd E. Clark & Michael W. McCracken, 2009. "In-sample tests of predictive ability: a new approach," Working Papers 2009-051, Federal Reserve Bank of St. Louis.
- James H. Stock & Mark W. Watson, 2007. "Why Has U.S. Inflation Become Harder to Forecast?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 3-33, 02.
- James H. Stock & Mark W. Watson, 2006. "Why Has U.S. Inflation Become Harder to Forecast?," NBER Working Papers 12324, National Bureau of Economic Research, Inc.
- James H. Stock & Mark W. Watson, 2007. "Erratum to "Why Has U.S. Inflation Become Harder to Forecast?"," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1849-1849, October.
- Dimitris Politis & Halbert White, 2004. "Automatic Block-Length Selection for the Dependent Bootstrap," Econometric Reviews, Taylor & Francis Journals, vol. 23(1), pages 53-70.
- Eric Hillebrand & Marcelo Medeiros, 2010. "The Benefits of Bagging for Forecast Models of Realized Volatility," Econometric Reviews, Taylor & Francis Journals, vol. 29(5-6), pages 571-593.
- Tae-Hwy Lee & Eric Hillebrand & Marcelo Medeiros, 2014. "Bagging Constrained Equity Premium Predictors," Working Papers 201421, University of California at Riverside, Department of Economics, revised Feb 2013. Full references (including those not matched with items on IDEAS)
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