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Testing for predictability in panels with general predictors

Westerlund, Per, Karabiyik, Hande and Narayan, Paresh 2017, Testing for predictability in panels with general predictors, Journal of applied econometrics, vol. 32, no. 3, April-May, pp. 554-574, doi: 10.1002/jae.2535.

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Title Testing for predictability in panels with general predictors
Author(s) Westerlund, Per
Karabiyik, Hande
Narayan, Paresh
Journal name Journal of applied econometrics
Volume number 32
Issue number 3
Season April-May
Start page 554
End page 574
Total pages 21
Publisher John Wiley & Sons
Place of publication Chichester, Eng.
Publication date 2017-04
ISSN 0883-7252
1099-1255
Keyword(s) Social Sciences
Economics
Social Sciences, Mathematical Methods
Business & Economics
Mathematical Methods In Social Sciences
STOCK RETURN PREDICTABILITY
EQUITY PREMIUM PREDICTION
UNIT-ROOT TESTS
CROSS-SECTION
HETEROGENEOUS PANELS
INFERENCE
REGRESSIONS
FORECASTS
VARIABLES
RATIOS
Summary The difficulty of predicting returns has recently motivated researchers to start looking for tests that are either more powerful or robust to more features of the data. Unfortunately, the way that these tests work typically involves trading robustness for power or vice versa. The current paper takes this as its starting point to develop a new panel-based approach to predictability that is both robust and powerful. Specifically, while the panel route to increased power is not new, the way in which the cross-section variation is exploited also to achieve robustness with respect to the predictor is. The result is two new tests that enable asymptotically standard normal and chi-squared inference across a wide range of empirically relevant scenarios in which the predictor may be stationary, moderately non-stationary, nearly non-stationary, or indeed unit root non-stationary. The type of cross-section dependence that can be permitted in the predictor is also very general, and can be weak or strong, although we do require that the cross-section dependence in the regression errors is of the strong form. What is more, this generality comes at no cost in terms of complicated test construction. The new tests are therefore very user-friendly.
Language eng
DOI 10.1002/jae.2535
Field of Research 150202 Financial Econometrics
1402 Applied Economics
1403 Econometrics
Socio Economic Objective 919999 Economic Framework not elsewhere classified
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2016, John Wiley & Sons
Persistent URL http://hdl.handle.net/10536/DRO/DU:30085214

Document type: Journal Article
Collection: Faculty of Business and Law
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