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A unified test for predictability of asset returns regardless of properties of predicting variables

Xiaohui Liu, Bingduo Yang, Zongwu Cai and Liang Peng

Journal of Econometrics, 2019, vol. 208, issue 1, 141-159

Abstract: Some unified tests have been proposed recently in the literature for testing predictability of asset returns based on a simple linear predictive regression model, which has a drawback that predicted variable cannot be stationary if the predicting variable is nonstationary. To solve this issue, this paper includes the difference of the predicting variable into the simple linear predictive regression. Furthermore, a unified empirical likelihood inference is developed to test the predictability regardless of the properties of the predicting variable. A simulation study is conducted to confirm the efficiency of the proposed methods before applying to a real example.

Keywords: Empirical likelihood; Predictive regression; Weighted score (search for similar items in EconPapers)
JEL-codes: C12 C22 (search for similar items in EconPapers)
Date: 2019
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Journal of Econometrics is currently edited by T. Amemiya, A. R. Gallant, J. F. Geweke, C. Hsiao and P. M. Robinson

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Handle: RePEc:eee:econom:v:208:y:2019:i:1:p:141-159