Halbert White Jr. Memorial JFEC Lecture: Pitfalls and Possibilities in Predictive Regression†

Peter Phillips

Journal of Financial Econometrics, 2015, vol. 13, issue 3, 521-555

Abstract: Financial theory and econometric methodology both struggle in formulating models that are logically sound in reconciling short-run martingale behavior for financial assets with predictable long-run behavior, leaving much of the research to be empirically driven. The present article overviews recent contributions to this subject, focusing on the main pitfalls in conducting predictive regression and on some of the possibilities offered by modern econometric methods. The latter options include indirect inference and techniques of endogenous instrumentation that use convenient temporal transforms of persistent regressors. Some additional suggestions are made for bias elimination, quantile crossing amelioration, and control of predictive model misspecification.

Keywords: bias; endogenous instrumentation; indirect inference; IVX estimation; local unit roots; mild integration; prediction; quantile crossing; unit roots; zero coverage probability (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (22)

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