Gonzalo, Jesus and Pitarakis, JeanYves (2010): Regime Specific Predictability in Predictive Regressions.

PDF
MPRA_paper_29190.pdf Download (269kB)  Preview 
Abstract
Predictive regressions are linear specifications linking a noisy variable such as stock returns to past values of a more persistent regressor with the aim of assessing the presence of predictability. Key complications that arise are the potential presence of endogeneity and the poor adequacy of asymptotic approximations. In this paper we develop tests for uncovering the presence of predictability in such models when the strength or direction of predictability may alternate across different economically meaningful episodes. An empirical application reconsiders the Dividend Yield based return predictability and documents a strong predictability that is countercyclical, occurring solely during bad economic times
Item Type:  MPRA Paper 

Original Title:  Regime Specific Predictability in Predictive Regressions 
Language:  English 
Keywords:  Endogeneity, Persistence, Return Predictability, Threshold Models 
Subjects:  C  Mathematical and Quantitative Methods > C5  Econometric Modeling > C50  General C  Mathematical and Quantitative Methods > C2  Single Equation Models ; Single Variables > C22  TimeSeries Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes 
Item ID:  29190 
Depositing User:  J Pitarakis 
Date Deposited:  06 Mar 2011 21:21 
Last Modified:  21 Jun 2016 20:13 
References:  Andrews, D. W. K., (1993), ``Tests for Parameter Instability and Structural Change with Unknown Change Point," {\it Econometrica}, Vol. 61, pp. 821856. Ang, A. and Bekaert, G. (2007), ``Stock Return Predictability: Is it There?," {\it Review of Financial Studies}, Vol. 20, pp. 651707. Bandi, F. and Perron, B. (2008), ``LongRun RiskReturn TradeOffs," {\it Journal of Econometrics}, Vol. 143, pp. 34974. Campbell, J. Y. and Yogo, M. (2006), ``Efficient tests of stock return predictability," {\it Journal of Financial Economics,} Vol. 81, pp. 2760. Caner, M. and Hansen, B. E. (2001), ``Threshold Autoregression with a Unit Root," {\it Econometrica,} Vol. 69, pp. 15551596. Cavanagh, C. L., G. Elliott, and Stock, J. H. (1995), ``Inference in Models with Nearly Integrated Regressors," {\it Econometric Theory}, Vol. 11, pp. 11311147. Chan, N. (1988), ``The Parameter Inference for Nearly Nonstationary Time Series The Parameter Inference for Nearly Nonstationary Time Series," {\it Journal of the American Statistical Association}, Vol. 83, pp. 857862. Cochrane, J. H. (2008), ``The dog that did not bark: a defense of return predictability," {\it Review of Financial Studies,} Vol. 21, pp. 15331575. %Davies, R. B. (1977), ``Hypothesis testing when a nuisance parameter is present only under the alternative," {\it Biometrika}, Vol. 64, pp. 247254. Elliott, G. (1998), ``On the Robustness of Cointegration Methods when Regressors Almost Have Unit Roots,'' {\it Econometrica}, Vol. 66, pp. 149158. Estrella, A. (2003), ``Critical Values and P Values of Bessel Process Distributions: Computation and Application to Structural Break Tests," {\it Econometric Theory}, Vol. 19, 11281143. Gonzalo, J. and Pitarakis, J. (2002), ``Estimation and Model Selection Based Inference in Single and Multiple Threshold Models," {\it Journal of Econometrics}, Vol. 110, pp. 319352. Gonzalo, J. and Wolf, M. (2005), ``Subsampling Inference in Threshold Autoregressive Models," {\it Journal of Econometrics}, Vol. 127, pp. 201224. %Hansen, B. E. (1992), ``Tests for Parameter Instability in Regressions with I(1) Processes," %{\it Journal of Business and Economic Statistics}, Vol. 10, pp. 32135. Hansen, B. E. (1996), ``Inference when a nuisance parameter is not identified under the null hypothesis," {\it Econometrica}, Vol. 64, pp. 413430. Hansen, B. E. (1997), ``Approximate asymptotic pvalues for structural change tests," {\it Journal of Business and Economic Statistics}, Vol. 15, pp. 6067. Hansen, B. E. (1999), ``Testing for Linearity," {\it Journal of Economic Surveys}, Vol. 13, pp. 551576. Hansen, B. E. (2000), ``Sample splitting and threshold estimation," {\it Econometrica}, Vol. 68, pp. 575603. Henkel, S. J., Martin, J. S. and Nardari, F. (2009), ``TimeVarying ShortHorizon Return Predictability," AFA 2008 New Orleans Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1101944. Jansson, M. and Moreira, M. J. (2006), ``Optimal Inference in Regression Models with Nearly Integrated Regressors," {\it Econometrica}, Vol. 74, pp. 681714. Kostakis, A., Magdalinos, A. and Stamatogiannis, M. (2010), ``Robust Econometric Inference for Stock Return Predictability,'' Unpublished Manuscript, University of Nottingham, UK. Lettau, M. and Van Nieuwerburgh, S. (2008), ``Reconciling the return predictability evidence," {\it Review of Financial Studies,} Vol. 21, pp. 16071652. Lewellen, J. (2004), ``Predicting returns with financial rations," {\it Journal of Financial Economics}, Vol. 74, pp. 209235. Magdalinos, A. (2010), Personal Communication. Menzly, L., T. Santos and Veronesi, P. (2004), ``Understanding predictability," {\it Journal of Political Economy,} Vol. 112, pp. Park, J.Y. and Phillips, P. C. B. (1988), ``Statistical Inference in Regressions With Integrated Processes: Part 1," {\it Econometric Theory}, Vol. 4, pp. 468497. %Park, J.Y. and Hahn, S. B. (1999), ``Cointegrating Regressions with Time Varying Coefficients," {\it Econometric Theory}, Vol. 15, pp. 664703. Petruccelli, J.D. (1992), ``On the approximation of time series by threshold autoregressive models," {\it Sankhya, Series B}, Vol. 54, pp. 5461. Phillips, P. C. B. (1988), ``Regression Theory for NearIntegrated Time Series," {\it Econometrica}, Vol. 56, pp. 10211043. Phillips, P. C. B. and Hansen, B. E. (1990), ``Statistical Inference in Instrumental Variables Regression with I(1) Process," {\it Review of Economic Studies,} Vol. 57, pp. 99125. Phillips, P. C. B. (1998), ``New Tools for Understanding Spurious Regressions," {\it Econometrica}, Vol. 66, pp. 12991325. Phillips, P. C. B. and Magdalinos, A. (2007), ``Limit theory for moderate deviations from a unit root under weak dependence," {\it Journal of Econometrics}, Vol. 136, pp. 115130. Phillips, P. C. B. and Magdalinos, A. (2009), ``Econometric Inference in the Vicinity of Unity,'' {\it Singapore Management University, CoFie Working Paper No. 7.} Pitarakis, J. (2008), ``Threshold Autoregressions with a unit root: Comment," {\it Econometrica}, Vol. 76, pp. 12071217. Rapach, D. E. and Wohar, M. E. (2006), ``Structural Breaks and Predictive Regression Models of Aggregate U.S. Stock Returns,'' {\it Journal of Financial Econometrics}, Vol. 4, pp. 238274. Rossi, B. (2005), ``Optimal Tests for Nested Model Selection with underlying Parameter Instability," {\it Econometric Theory}, Vol. 21, pp. 962990. Rossi, B. (2006), ``Are Exchange Rates Really Random Walks? Some Evidence Robust to Parameter Instability,'' {\it Macroeconomic Dynamics}, Vol. 10, pp. 2038. Saikkonen, P. (1991), ``Asymptotically Efficient Estimation of Cointegrating Regressions,'' {\it Econometric Theory,} Vol. 7, pp. 121. Saikkonen, P. (1992), ``Estimation and Testing of Cointegrated Systems by an Autoregressive Approximation,'' {\it Econometric Theory,} Vol. 8, pp. 127. Timmermann, A. (2008), ``Elusive Return Predictability,'' {\it International Journal of Forecasting}, Vol. 24, pp. 118. Valkanov, R. (2003), ``Longhorizon regressions: theoretical results and applications," {\it Journal of Financial Economics,} Vol. 68, pp. 201232. Van der Vaart, J. and Wellner, J. (1996), Weak Convergence and Empirical Processes: With Applications to Statistics. SpringerVerlag, NewYork. White, H. (2001), Asymptotic Theory for Econometricians. Academic Press. 
URI:  https://mpra.ub.unimuenchen.de/id/eprint/29190 