EconPapers    
Economics at your fingertips  
 

Consistent Local Spectrum (LCM) Inference for Predictive Return Regressions

Torben Andersen () and Rasmus T. Varneskov

No 28569, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the properties of predictive regressions for asset returns in economic systems governed by persistent vector autoregressive dynamics. In particular, we allow for the state variables to be fractionally integrated, potentially of different orders, and for the returns to have a latent persistent conditional mean, whose memory is difficult to estimate consistently by standard techniques in finite samples. Moreover, the predictors may be endogenous and “imperfect”. In this setting, we develop a consistent Local speCtruM (LCM) estimation procedure, that delivers asymptotic Gaussian inference. Furthermore, we provide a new LCM-based estimator of the conditional mean persistence, that leverages biased regression slopes as well as new LCM-based tests for significance of (a subset of) the predictors, which are valid even without estimating the return persistence. Simulations illustrate the theoretical arguments. Finally, in an empirical application to monthly S&P 500 return predictions, we provide evidence for a fractionally integrated conditional mean component. Moreover, using our new LCM procedure and tools, we document significant predictive power for key state variables such as the default spread and treasury interest rates.

JEL-codes: G12 G17 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-ecm and nep-ore
Note: AP TWP
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.nber.org/papers/w28569.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:28569

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w28569

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2022-09-03
Handle: RePEc:nbr:nberwo:28569