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A Class of Robust Tests in Augmented Predictive Regressions

  • Paulo M.M. Rodrigues
  • Antonio Rubia

This paper focuses on the analytical discussion of a robust t-test for predictability and on the analysis of its finite-sample properties. Our analysis shows that the procedure proposed exhibits approximately correct size even in fairly small samples. Furthermore, the test is well-behaved under short-run dependence, and can exhibit improved power performance over alternative procedures. These appealing properties, together with the fact that the test can be applied in a simple and direct way in the linear regression context, suggests that the modified t-statistic introduced in this paper is well suited for addressing predictability in empirical applications.

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File URL: http://www.bportugal.pt/en-US/BdP%20Publications%20Research/wp201126.pdf
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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w201126.

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Date of creation: 2011
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Handle: RePEc:ptu:wpaper:w201126
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