The Stambaugh bias in panel predictive regressions

Erik Hjalmarsson

No 914, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper analyzes predictive regressions in a panel data setting. The standard fixed effects estimator suffers from a small sample bias, which is the analogue of the Stambaugh bias in time-series predictive regressions. Monte Carlo evidence shows that the bias and resulting size distortions can be severe. A new bias-corrected estimator is proposed, which is shown to work well in finite samples and to lead to approximately normally distributed t-statistics. 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. The results are illustrated with an application to predictability in international stock indices.

Keywords: Panel analysis; Stocks (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (1)

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Journal Article: The Stambaugh bias in panel predictive regressions (2008)
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