Pitfalls and Possibilities in Predictive Regression
Financial theory and econometric methodology both struggle in formulating models that are logically sound in reconciling short run martingale behaviour for financial assets with predictable long run behavior, leaving much of the research to be empirically driven. The present paper overviews recent contributions to this subject, focussing on the main pitfalls in conducting predictive regression and on some of the possibilities offered by modern econometric methods. The latter options include indirect inference and techniques of endogenous instrumentation that use convenient temporal transforms of persistent regressors. Some additional suggestions are made for bias elimination, quantile crossing amelioration, and control of predictive model misspecification.
|Date of creation:||Jun 2015|
|Publication status:||Published in Journal of Financial Econometrics (Summer 2015), 13(3): 521-555|
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|Order Information:|| Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA|
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