Harvey, David I and Leybourne, Stephen J and Taylor, AM Robert (2021) Simple Tests for Stock Return Predictability with Good Size and Power Properties. Working Paper. Essex Finance Centre Working Papers. (Unpublished)
Harvey, David I and Leybourne, Stephen J and Taylor, AM Robert (2021) Simple Tests for Stock Return Predictability with Good Size and Power Properties. Working Paper. Essex Finance Centre Working Papers. (Unpublished)
Harvey, David I and Leybourne, Stephen J and Taylor, AM Robert (2021) Simple Tests for Stock Return Predictability with Good Size and Power Properties. Working Paper. Essex Finance Centre Working Papers. (Unpublished)
Abstract
We develop easy-to-implement tests for return predictability which, relative to extant tests in the literature, display attractive finite sample size control and power across a wide range of persistence and endogeneity levels for the predictor. Our approach is based on the standard regression t-ratio and a variant where the predictor is quasi-GLS (rather than OLS) demeaned. In the strongly persistent near-unit root environment, the limiting null distributions of these statistics depend on the endogeneity and local-to-unity parameters characterising the predictor. Analysis of the asymptotic local power functions of feasible implementations of these two tests, based on asymptotically conservative critical values, motivates a switching procedure between the two, employing the quasi-GLS demeaned variant unless the magnitude of the estimated endogeneity correlation parameter is small. Additionally, if the data suggests the predictor is weakly persistent, our approach switches into the standard t-ratio test with reference to standard normal critical values.
Item Type: | Monograph (Working Paper) |
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Uncontrolled Keywords: | predictive regression; persistence; endogeneity; quasi-GLS demeaning; unit root test; hybrid statistic |
Divisions: | Faculty of Social Sciences Faculty of Social Sciences > Essex Business School |
SWORD Depositor: | Unnamed user with email elements@essex.ac.uk |
Depositing User: | Unnamed user with email elements@essex.ac.uk |
Date Deposited: | 15 Feb 2021 17:25 |
Last Modified: | 16 May 2024 20:42 |
URI: | http://repository.essex.ac.uk/id/eprint/29814 |
Available files
Filename: 67_RT_title.pdf