Assessing the Power of Long-Horizon Predictive Tests in Models of Bull and Bear Markets

Alex Maynard and Dongmeng Ren

A chapter in Essays in Honor of Peter C. B. Phillips, 2014, vol. 33, pp 673-711 from Emerald Group Publishing Limited

Abstract: We compare the finite sample power of short- and long-horizon tests in nonlinear predictive regression models of regime switching between bull and bear markets, allowing for time varying transition probabilities. As a point of reference, we also provide a similar comparison in a linear predictive regression model without regime switching. Overall, our results do not support the contention of higher power in longer horizon tests in either the linear or nonlinear regime switching models. Nonetheless, it is possible that other plausible nonlinear models provide stronger justification for long-horizon tests.

Keywords: Predictive regression; long-horizon regression; regime-switching; nonlinear; stock return predictability; G12; G14; C51; C53; C58 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aecozz:s0731-905320140000033019

DOI: 10.1108/S0731-905320140000033019

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