Why Long Horizons: A Study of Power Against Persistent Alternatives
John Campbell ()
No 142, NBER Technical Working Papers from National Bureau of Economic Research, Inc
This paper studies tests of predictability in regressions with a given AR(1) regressor and an asset return dependent variable measured over a short or long horizon. The paper shows that when there is a persistent predictable component in the return, an increase in the horizon may increase the R2 statistic of the regression and the approximate slope of a predictability test. Mone Carlo experiments show that long-horizon regression tests have serious size distortions when asymptotic critical values are used, but some versions of such tests have power advantages remaining after size is corrected.
JEL-codes: C22 G12 (search for similar items in EconPapers)
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Published as Campbell, John Y. "Why Long Horizons? A Study Of Power Against Persistent Alternatives," Journal of Empirical Finance, 2001, v8(5,Dec), 459-491.
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