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Inferring the predictability induced by a persistent regressor in a predictive threshold model

Inferring the predictability induced by a persistent regressor in a predictive threshold model
Inferring the predictability induced by a persistent regressor in a predictive threshold model
We develop tests for detecting possibly episodic predictability induced by a persistent predictor. Our framework is that of a predictive regression model with threshold effects and our goal is to develop operational and easily implementable inferences when one does not wish to impose a priori restrictions on the parameters of the model other than the slopes corresponding to the persistent predictor. Differently put our tests for the null hypothesis of no predictability against threshold predictability remain valid without the need to know whether the remaining parameters of the model are characterised by threshold effects or not (e.g. shifting versus non-shifting intercepts). One interesting feature of our setting is that our test statistics remain unaffected by whether some nuisance parameters are identified or not. We subsequently apply our methodology to the predictability of aggregate stock returns with valuation ratios and document a robust countercyclicality in the ability of some valuation ratios to predict returns in addition to highlighting a strong sensitivity of predictability based results to the time period under consideration.
predictive regressions, threshold effects, predictability of stock return
1518
University of Southampton
Gonzalo, Jesus
57637a0a-f7da-417f-9d2e-3a33a7082504
Pitarakis, Jean-Yves
ee5519ae-9c0f-4d79-8a3a-c25db105bd51
Gonzalo, Jesus
57637a0a-f7da-417f-9d2e-3a33a7082504
Pitarakis, Jean-Yves
ee5519ae-9c0f-4d79-8a3a-c25db105bd51

Gonzalo, Jesus and Pitarakis, Jean-Yves (2015) Inferring the predictability induced by a persistent regressor in a predictive threshold model (Discussion Papers in Economics and Econometrics, 1518) Southampton, GB. University of Southampton 23pp.

Record type: Monograph (Working Paper)

Abstract

We develop tests for detecting possibly episodic predictability induced by a persistent predictor. Our framework is that of a predictive regression model with threshold effects and our goal is to develop operational and easily implementable inferences when one does not wish to impose a priori restrictions on the parameters of the model other than the slopes corresponding to the persistent predictor. Differently put our tests for the null hypothesis of no predictability against threshold predictability remain valid without the need to know whether the remaining parameters of the model are characterised by threshold effects or not (e.g. shifting versus non-shifting intercepts). One interesting feature of our setting is that our test statistics remain unaffected by whether some nuisance parameters are identified or not. We subsequently apply our methodology to the predictability of aggregate stock returns with valuation ratios and document a robust countercyclicality in the ability of some valuation ratios to predict returns in addition to highlighting a strong sensitivity of predictability based results to the time period under consideration.

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More information

Published date: January 2015
Keywords: predictive regressions, threshold effects, predictability of stock return
Organisations: Economics

Identifiers

Local EPrints ID: 374117
URI: http://eprints.soton.ac.uk/id/eprint/374117
PURE UUID: 9a4c0a21-5d17-4a52-afea-0b3dc35ccb7c
ORCID for Jean-Yves Pitarakis: ORCID iD orcid.org/0000-0002-6305-7421

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Date deposited: 09 Feb 2015 16:38
Last modified: 15 Mar 2024 03:16

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Contributors

Author: Jesus Gonzalo

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