A0514
Title: Unified inference for long-horizon predictive regressions
Authors: Seok Young Hong - Nanyang Technological University (Singapore) [presenting]
Abstract: A unified procedure is proposed for testing the predictability of asset returns based on the empirical likelihood (EL) method. Several novel methodological contributions are made. First, the predictor variable is allowed in the unified test to be mildly integrated or mildly explosive in addition to the usual persistence classes permitted in the empirical likelihood literature: stationary, locally integrated, and unit root cases, thereby covering virtually most possible scenarios that the econometricians may face. Second, heteroscedasticity in the error term is allowed, and the usual regularity conditions imposed previously are relaxed. Lastly, it is proposed to utilize a two-stage approach in employing the EL method, addressing the efficiency issue of the sample-splitting approach. The robust procedure is applied to investigate the long-run predictive regression model. An empirical application is conducted on the US stock market, reporting evidence of predictability with the T-bills and the inflation rate. A simulation study confirms that the proposed test performs very well in finite samples, exhibiting robust size and power properties.
