Inference for Noisy Long Run Component Process

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

Abstract

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

• Item Type: MPRA Paper
• Language: English
• Keywords: Long Run, Predictability Puzzle, Weak Identification, Deconvolution, Term Structure, Near Unit Root, Small Sigma.
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; E - Macroeconomics and Monetary Economics > E0 - General

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