The Stambaugh bias in panel predictive regressions

Erik Hjalmarsson

Finance Research Letters, 2008, vol. 5, issue 1, 47-58

Abstract: This paper analyzes predictive regressions in a panel data setting. The standard fixed effects estimator suffers from a small sample bias, which is the analogue of the Stambaugh bias in time-series predictive regressions. Monte Carlo evidence shows that the bias and resulting size distortions can be severe. A new bias-corrected estimator is proposed, which is shown to work well in finite samples and to lead to approximately normally distributed t-statistics. Overall, the results show that the econometric issues associated with predictive regressions when using time-series data to a large extent also carry over to the panel case. The results are illustrated with an application to predictability in international stock indices.

Date: 2008
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Citations: View citations in EconPapers (15)

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Working Paper: The Stambaugh bias in panel predictive regressions (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:5:y:2008:i:1:p:47-58

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