Munich Personal RePEc Archive

Inference for Noisy Long Run Component Process

Gourieroux, Christian and Jasiak, Joann (2010): Inference for Noisy Long Run Component Process.

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This paper introduces a new approach to the modelling of a stationary long run component, which is an autoregressive process with near unit root and small sigma innovation. We show that a combination of a noise and a long run component can explain the long run predictability puzzle pointed out in Fama-French (1988). Moreover in the presence of a long run component, spurious regressions arise and misleading long run predictions are obtained when standard statistical approaches are applied

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