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A New Test on Asset Return Predictability with Structural Breaks

Author

Listed:
  • Zongwu Cai

    (Department of Economics, The University of Kansas, Lawrence, KS 66045, USA)

  • Seong Yeon Chang

    (Department of Economics, Soongsil University, Seoul 06978, Korea)

Abstract

This paper considers predictive regressions in which a structural break is allowed on an unknown date. We establish novel testing procedures for asset return predictability using empirical likelihood methods based on weighted-score equations. The theoretical results are useful in practice because our unified framework does not require distinguishing whether the predictor variables are stationary or nonstationary. Simulations show that the empirical likelihood-based tests perform well in terms of size and power in finite samples. As an empirical analysis, we test asset returns predictability using various predictor variables.

Suggested Citation

  • Zongwu Cai & Seong Yeon Chang, 2022. "A New Test on Asset Return Predictability with Structural Breaks," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 202206, University of Kansas, Department of Economics, revised Feb 2022.
    • Handle: RePEc:kan:wpaper:202206
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    File URL: http://www2.ku.edu/~kuwpaper/2022Papers/202206.pdf
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    More about this item

    Keywords

    Autoregressive process; Empirical likelihood; Structural break; Unit root; Weighted estimation;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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