A New Test for Multiple Predictive Regression*

Ke-Li Xu and Junjie Guo

Journal of Financial Econometrics, 2024, vol. 22, issue 1, 119-156

Abstract: We consider inference for predictive regressions with multiple predictors. Extant tests for predictability (especially for joint predictability) may perform unsatisfactorily and tend to discover spurious predictability as the number of predictors increases. We propose a battery of new instrumental variables-based tests which involve enforcement or partial enforcement of the null hypothesis in variance estimation. A test based on the few-predictors-at-a-time parsimonious system approach is recommended. Empirical Monte Carlos demonstrates the remarkable finite-sample performance regardless of numerosity of predictors and their persistence properties. Empirical application to equity premium predictability is provided.

Keywords: curse of dimensionality; Lagrange-multipliers test; persistence; predictive regression; return predictability (search for similar items in EconPapers)
JEL-codes: C32 C53 C58 G17 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (1)

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