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Journal of Economic Theory and Econometrics
Journal of the Korean Econometric Society
Test of Return Predictability: A New Two-Step Procedure
Vol.20, No.4, December 2009, 50–73
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Jinho Bae
(Department of Economics, Konkuk University)
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Abstract
Predictive regressions are subject to finite sample bias. We propose a new twostep procedure to make correct inference for predictive regressions. Simulation results show that our procedure performs better than the existing two-step procedure in eliminating the bias and size distortion of the conventional $t$-test. We apply this procedure and find that dividend yield has lost predictive power for return since the early 1990s.
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Keywords
Predictive Regression, Bias Correction, Two-Step Estimation, Structural |
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