A New Test on Asset Return Predictability with Structural Breaks

Zongwu Cai and Seong Yeon Chang
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Zongwu Cai: Department of Economics, The University of Kansas, Lawrence, KS 66045, USA
Seong Yeon Chang: Department of Economics, Soongsil University, Seoul 06978, Korea

No 202206, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics

Abstract: This paper considers predictive regressions in which a structural break is allowed on an unknown date. We establish novel testing procedures for asset return predictability using empirical likelihood methods based on weighted-score equations. The theoretical results are useful in practice because our unified framework does not require distinguishing whether the predictor variables are stationary or nonstationary. Simulations show that the empirical likelihood-based tests perform well in terms of size and power in finite samples. As an empirical analysis, we test asset returns predictability using various predictor variables.

Keywords: Autoregressive process; Empirical likelihood; Structural break; Unit root; Weighted estimation (search for similar items in EconPapers)
JEL-codes: C12 C14 C32 G12 (search for similar items in EconPapers)
Date: 2022-02, Revised 2202-02
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-his
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