 On Confidence Intervals for Autoregressive Roots and Predictive RegressionEconometrica, 2014, vol. 82, issue 3, 1177-1195 Abstract: Local to unity limit theory is used in applications to construct confidence intervals (CIs) for autoregressive roots through inversion of a unit root test (Stock (1991)). Such CIs are asymptotically valid when the true model has an autoregressive root that is local to unity (ρ = 1 + c/n), but are shown here to be invalid at the limits of the domain of definition of the localizing coefficient c because of a failure in tightness and the escape of probability mass. Failure at the boundary implies that these CIs have zero asymptotic coverage probability in the stationary case and vicinities of unity that are wider than O(n-super-−1/3). The inversion methods of Hansen (1999) and Mikusheva (2007) are asymptotically valid in such cases. Implications of these results for predictive regression tests are explored. When the predictive regressor is stationary, the popular Campbell and Yogo (2006) CIs for the regression coefficient have zero coverage probability asymptotically, and their predictive test statistic Q erroneously indicates predictability with probability approaching unity when the null of no predictability holds. These results have obvious cautionary implications for the use of the procedures in empirical practice. Date: 2014 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:wly:emetrp:v:82:y:2014:i:3:p:1177-1195 Ordering information: This journal article can be ordered from Access Statistics for this article Econometrica is currently edited by Guido W. Imbens More articles in Econometrica from Econometric Society Contact information at EDIRC. |
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