Pitfalls and Possibilities in Predictive Regression

Peter Phillips

No 2003, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: Financial theory and econometric methodology both struggle in formulating models that are logically sound in reconciling short run martingale behaviour for financial assets with predictable long run behavior, leaving much of the research to be empirically driven. The present paper overviews recent contributions to this subject, focussing 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)
JEL-codes: C22 C23 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2015-06
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-for
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Citations: View citations in EconPapers (31)

Published in Journal of Financial Econometrics (Summer 2015), 13(3): 521-555

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