Regime Specific Predictability in Predictive Regressions

Jesus Gonzalo and Jean-Yves Pitarakis

MPRA Paper from University Library of Munich, Germany

Abstract: Predictive regressions are linear specifications linking a noisy variable such as stock returns to past values of a more persistent regressor with the aim of assessing the presence of predictability. Key complications that arise are the potential presence of endogeneity and the poor adequacy of asymptotic approximations. In this paper we develop tests for uncovering the presence of predictability in such models when the strength or direction of predictability may alternate across different economically meaningful episodes. An empirical application reconsiders the Dividend Yield based return predictability and documents a strong predictability that is countercyclical, occurring solely during bad economic times

Keywords: Endogeneity; Persistence; Return Predictability; Threshold Models (search for similar items in EconPapers)
JEL-codes: C22 C50 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-for
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Regime-Specific Predictability in Predictive Regressions (2011)
Working Paper: Regime specific predictability in predictive regressions (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:29190

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