Predictive regression with p-lags and order-q autoregressive predictors
Journal article
Jayetileke, Harshanie L., Wang, You-Gan and Zhu, Min. (2021). Predictive regression with p-lags and order-q autoregressive predictors. Journal of Empirical Finance. 62, pp. 282-293. https://doi.org/10.1016/j.jempfin.2021.04.006
Authors | Jayetileke, Harshanie L., Wang, You-Gan and Zhu, Min |
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Abstract | This paper considers predictive regressions, where yt is predicted by all p lags of xt, here with xt being autoregressive of order q, PR(p,q). The literature considers model properties in the cases where p=q. We demonstrate that the current augmented regression method can still reduce the bias in predictive coefficients, but its efficiency depends on correctly specifying both p and q. We propose an estimation framework for the predictive regression, PR(p,q), with a data-driven auto-selection of p and q to achieve the best bias reduction in predictive coefficients. The corresponding hypothesis testing procedure is also derived. The efficiency of the proposed method is demonstrated with simulations. Empirical applications to equity premium prediction illustrate the substantial difference between the estimates of our method and those obtained by the common predictive regressions with p=q. |
Keywords | predictive regressions; bias; augmented regression; return predictability |
Year | 2021 |
Journal | Journal of Empirical Finance |
Journal citation | 62, pp. 282-293 |
Publisher | Elsevier B.V. |
ISSN | 0927-5398 |
Digital Object Identifier (DOI) | https://doi.org/10.1016/j.jempfin.2021.04.006 |
Scopus EID | 2-s2.0-85105546034 |
Page range | 282-293 |
Funder | Australian Research Council (ARC) |
University of Queensland | |
Publisher's version | License All rights reserved File Access Level Controlled |
Output status | Published |
Publication dates | |
Online | 03 May 2021 |
Publication process dates | |
Accepted | 25 Apr 2021 |
Deposited | 12 Dec 2022 |
ARC Funded Research | This output has been funded, wholly or partially, under the Australian Research Council Act 2001 |
Grant ID | DP160104292 |
UQECR2058053 | |
CE140100049 |
https://acuresearchbank.acu.edu.au/item/8y8w0/predictive-regression-with-p-lags-and-order-q-autoregressive-predictors
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