Halbert White Jr. Memorial JFEC Lecture: Pitfalls and Possibilities in Predictive Regression

Halbert White Jr. Memorial JFEC Lecture: Pitfalls and Possibilities in Predictive Regression

Financial theory and econometric methodology both struggle in formulating models that are logically sound in reconciling short-run martingale behavior for financial assets with predictable long-run behavior, leaving much of the research to be empirically driven. The present article overviews recent...

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Bibliographic Details
Main Author: Peter C. B. PHILLIPS
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2015
Subjects:
bias
endogenous instrumentation
indirect inference
IVX estimation
local unit roots
mild integration
prediction
quantile crossing
unit roots
zero coverage probability
Econometrics
Online Access:https://ink.library.smu.edu.sg/soe_research/1864
https://ink.library.smu.edu.sg/context/soe_research/article/2864/viewcontent/Pitfalls_av.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:Financial theory and econometric methodology both struggle in formulating models that are logically sound in reconciling short-run martingale behavior for financial assets with predictable long-run behavior, leaving much of the research to be empirically driven. The present article overviews recent contributions to this subject, focusing on the main pitfalls in conducting predictive regression and on some of the possibilities offered by modern econometric methods. The latter options include indirect inference and techniques of endogenous instrumentation that use convenient temporal transforms of persistent regressors. Some additional suggestions are made for bias elimination, quantile crossing amelioration, and control of predictive model misspecification.

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