Predictive Regression and Robust Hypothesis Testing: Predictability Hidden by Anomalous Observations

57 Pages Posted: 12 Jun 2012

See all articles by Lorenzo Camponovo

Lorenzo Camponovo

University of St. Gallen

O. Scaillet

University of Geneva GSEM and GFRI; Swiss Finance Institute; University of Geneva - Research Center for Statistics

Fabio Trojani

Swiss Finance Institute; University of Geneva

Date Written: June 10, 2012

Abstract

Testing procedures for predictive regressions with lagged autoregressive variables imply a suboptimal inference in presence of small violations of ideal assumptions. We propose a novel testing framework resistant to such violations, which is consistent with nearly integrated regressors and applicable to multi-predictor settings, when the data may only approximately follow a predictive regression model. The Monte Carlo evidence demonstrates large improvements of our approach, while the empirical analysis produces a strong robust evidence of market return predictability, using predictive variables such as the dividend yield, the volatility risk premium or labor income.

Suggested Citation

Camponovo, Lorenzo and Scaillet, Olivier and Trojani, Fabio, Predictive Regression and Robust Hypothesis Testing: Predictability Hidden by Anomalous Observations (June 10, 2012). Available at SSRN: https://ssrn.com/abstract=2080766 or http://dx.doi.org/10.2139/ssrn.2080766

Lorenzo Camponovo (Contact Author)

University of St. Gallen ( email )

Varnbuelstr. 14
Saint Gallen, St. Gallen CH-9000
Switzerland

Olivier Scaillet

University of Geneva GSEM and GFRI ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland
+ 41 22 379 88 16 (Phone)
+41 22 389 81 04 (Fax)

HOME PAGE: http://www.scaillet.ch

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics

Geneva
Switzerland

Fabio Trojani

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva ( email )

Geneva, Geneva
Switzerland

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