Predictive Regressions

Robert Stambaugh

No 240, NBER Technical Working Papers from National Bureau of Economic Research, Inc

Abstract: When a rate of return is regressed on a lagged stochastic regressor, such as a dividend yield, the regression disturbance is correlated with the regressor's innovation. The OLS estimator's finite-sample properties, derived here, can depart substantially from the standard regression setting. Bayesian posterior distributions for the regression parameters are obtained under specifications that differ with respect to (i) prior beliefs about the autocorrelation of the regressor and (ii) whether the initial observation of the regressor is specified as fixed or stochastic. The posteriors differ across such specifications asset allocations in the presence of estimation risk exhibit sensitivity to those differences.

JEL-codes: C11 C32 (search for similar items in EconPapers)
Date: 1999-05
New Economics Papers: this item is included in nep-ecm and nep-fin
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Citations: View citations in EconPapers (803)

Published as Journal of Financial Economics, Vol. 54 (1999): 375-421.

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Journal Article: Predictive regressions (1999)
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