Balanced predictive regressions

Yu Ren (), Yundong Tu and Yanping Yi

Journal of Empirical Finance, 2019, vol. 54, issue C, 118-142

Abstract: In a predictive regression, a less persistent return series is regressed on the first lag of some highly persistent predictors. Therefore, predictability could often be missed due to the persistence imbalance. The aim of this paper is to balance the predictive regression by augmenting it with an additional lag of the predictors. This second lag generally reduces the persistence level on the right-hand side of the equation to achieve balance. We then propose a simple test procedure for univariate and multivariate predictive regressions, based on least squares estimation. Empirically, we reexamine the popular predictors in the literature and find quite different results.

Keywords: Nearly integrated process; Predictive regression; Predictability; Stock return (search for similar items in EconPapers)
JEL-codes: C12 C22 C32 G1 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:54:y:2019:i:c:p:118-142

DOI: 10.1016/j.jempfin.2019.09.001

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