The Long and the Short of It: Long Memory Regressors and Predictive Regressions
Aaron Smallwood; Alex Maynard; Mark Wohar
Authors registered in the RePEc Author Service: Alex S. Maynard,
Aaron Smallwood and
Mark Wohar ()
No 384, Computing in Economics and Finance 2005 from Society for Computational Economics
Abstract:
Persistent regressors pose a common problem in predictive regressions. Tests of the forward rate unbiased hypothesis (FRUH) constitute a prime example. Standard regression tests that strongly reject FRUH have been questioned on the grounds of potential long-memory in the forward premium. Researchers have argued that this could create a regression imbalance thereby invalidating standard statistical inference. To address this concern we employ a two-step procedure that rebalances the predictive equation, while still permitting us to impose the null of FRUH. We conduct a comprehensive simulation study to validate our procedure. The simulations demonstrate the good small sample performance of our two-stage procedure, and its robustness to possible errors in the first stage estimation of the memory parameter. By contrast, the simulations for standard regression tests show the potential for significant size distortion, validating the concerns of previous researchers. Our empirical application to excess returns, suggests less evidence against FRUH than found using the standard, but possibly questionable, t-tests.
Keywords: Long Memory; Predictive Regressions; Forward Rate Unbiasedness Hypothesis (search for similar items in EconPapers)
JEL-codes: C12 C22 F31 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-ecm and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
http://repec.org/sce2005/up.28508.1107209822.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:sce:scecf5:384
Access Statistics for this paper
More papers in Computing in Economics and Finance 2005 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().