Robust inference with stochastic local unit root regressors in predictive regressions

Publication Type

Journal Article

Publication Date

8-2023

Abstract

This paper explores predictive regression models with stochastic unit root (STUR) components and robust inference procedures that encompass a wide class of persistent and time-varying stochastically nonstationary regressors. The paper extends the mechanism of endogenously generated instrumentation known as IVX, showing that these methods remain valid for short and long-horizon predictive regressions in which the predictors have STUR and local STUR (LSTUR) generating mechanisms. Both mean regression and quantile regression methods are considered. The asymptotic distributions of the IVX estimators are new and require some new methods in their derivation. The distributions are compared to previous results and, as in earlier work, lead to pivotal limit distributions for Wald testing procedures that remain robust for both single and multiple regressors with various degrees of persistence and stochastic and fixed local departures from unit roots. Numerical experiments corroborate the asymptotic theory, and IVX testing shows good power and size control. The IVX methods are illustrated in an empirical application to evaluate the predictive capability of economic fundamentals in forecasting S&P 500 excess returns.

Keywords

IVX, Long horizon, LSTUR, predictability, quantile regression, robustness, short horizon, STUR

Discipline

Econometrics

Research Areas

Econometrics

Publication

Journal of Econometrics

Volume

235

Issue

2

First Page

563

Last Page

591

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2022.06.002

Publisher

Elsevier: 24 months

Additional URL

https://doi.org/10.1016/j.jeconom.2022.06.002

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