Title

Halbert White Jr. Memorial JFEC Lecture: Pitfalls and Possibilities in Predictive Regression

Publication Type

Journal Article

Publication Date

6-2015

Abstract

Financial theory and econometric methodology both struggle in formulating models that are logically sound in reconciling short-run martingale behavior for financial assets with predictable long-run behavior, leaving much of the research to be empirically driven. The present article overviews recent contributions to this subject, focusing on the main pitfalls in conducting predictive regression and on some of the possibilities offered by modern econometric methods. The latter options include indirect inference and techniques of endogenous instrumentation that use convenient temporal transforms of persistent regressors. Some additional suggestions are made for bias elimination, quantile crossing amelioration, and control of predictive model misspecification.

Keywords

bias, endogenous instrumentation, indirect inference, IVX estimation, local unit roots, mild integration, prediction, quantile crossing, unit roots, zero coverage probability

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Financial Econometrics

Volume

13

Issue

3

First Page

521

Last Page

555

ISSN

1479-8409

Identifier

10.1093/jjfinec/nbv014

Publisher

Oxford University Press (OUP): Policy F - Oxford Open Option D

Additional URL

http://dx.doi.org/10.1093/jjfinec/nbv014

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