Predictive regressions with panel data

Erik Hjalmarsson

No 869, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper analyzes panel data inference in predictive regressions with endogenous and nearly persistent regressors. The standard fixed effects estimator is shown to suffer from a second order bias; analytical results, as well as Monte Carlo evidence, show that the bias and resulting size distortions can be severe. New estimators, based on recursive demeaning as well as direct bias correction, are proposed and methods for dealing with cross sectional dependence in the form of common factors are also developed. 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. However, practical solutions are more readily available when using panel data. The results are illustrated with an application to predictability in international stock indices.

Keywords: Financial institutions; Econometrics (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-ecm and nep-ets
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Citations: View citations in EconPapers (4)

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Working Paper: Predictive regressions with panel data (2005)
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