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Does the choice of estimator matter when forecasting returns?

  • Joakim Westerlund


    (Deakin University)

  • Paresh K Narayan


    (Deakin University)

While the literature concerned with the predictability of stock returns is huge, surprisingly little is known when it comes to role of the choice of estimator of the predictive regression. Ideally, the choice of estimator should be rooted in the salient features of the data. In case of predictive regressions of returns there are at least three such features; (i) returns are heteroskedastic, (ii) predictors are persistent, and (iii) regression errors are correlated with predictor innovations. In this paper we examine if the accounting of these features in the estimation process has any bearing on our ability to forecast future returns. The results suggest that it does.

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Paper provided by Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance in its series Financial Econometics Series with number 2012_01.

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Length: 30
Date of creation: 11 May 2012
Date of revision:
Handle: RePEc:dkn:ecomet:fe_2012_01
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