Predictability Hidden by Anomalous Observations
62 Pages Posted: 23 Mar 2013 Last revised: 5 Mar 2014
Date Written: March 3, 2014
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 hidden by anomalous observations, both in- and out-of-sample, using predictive variables such as the dividend yield or the volatility risk premium.
Keywords: Predictive Regression, Stock Return Predictability, Bootstrap, Subsampling, Robustness
JEL Classification: C12, C13, G1
Suggested Citation: Suggested Citation