Enhancing the local power of IVX-based tests in predictive regressions

Matei Demetrescu

Economics Letters, 2014, vol. 124, issue 2, 269-273

Abstract: IVX estimation is used increasingly often in predictive regressions with regressors of unknown persistence. While not exhibiting the second-order bias the OLS estimator has in this setup, IVX estimators have reduced rates of convergence when the regressors are highly persistent. The reduced convergence rates may sometimes lead to power losses in finite samples when testing for no predictability, for instance. The note discusses a simple way of improving the local power of IVX-based tests, consisting of augmenting the predictive regression with the lagged dependent variable. This implies a feed-back loop which strengthens the signal of the IVX instrument without changing its dynamic properties. The proposed augmentation works best when the power loss of IVX would have been maximal compared to the infeasible OLS-based test.

Keywords: Predictive power; Unknown persistence; IV estimation; Lag augmentation; Variable addition (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165176514002092
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:124:y:2014:i:2:p:269-273

DOI: 10.1016/j.econlet.2014.05.032

Access Statistics for this article

Economics Letters is currently edited by Economics Letters Editorial Office

More articles in Economics Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().