Finite Sample Analysis of Predictive Regressions with Long-Horizon Returns

112 Pages Posted: 23 Feb 2021 Last revised: 12 Sep 2022

See all articles by Raymond Kan

Raymond Kan

University of Toronto - Rotman School of Management

Jiening Pan

Nankai University

Date Written: September 9, 2022

Abstract

In this paper, we provide an exact finite sample analysis of predictive regressions with overlapping long-horizon returns. This analysis allows us to evaluate the reliability of various asymptotic theories for predictive regressions in finite samples. In addition, our finite sample analysis sheds lights on the long outstanding question of whether a predictive regression with short or long-horizon returns is more powerful in detecting return predictability. Finally, we provide a simple bias-adjusted estimator of the slope coefficient as well as its estimated standard error for predictive regression with long-horizon returns. The resulting t-ratio of our bias-adjusted estimator has excellent size properties and dominates existing alternatives in the literature.

Keywords: Predictive regression, finite sample distribution, local to unit root

JEL Classification: C01, G14

Suggested Citation

Kan, Raymond and Pan, Jiening, Finite Sample Analysis of Predictive Regressions with Long-Horizon Returns (September 9, 2022). Rotman School of Management Working Paper No. 3790052, Available at SSRN: https://ssrn.com/abstract=3790052 or http://dx.doi.org/10.2139/ssrn.3790052

Raymond Kan (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S3E6
Canada
416-978-4291 (Phone)
416-971-3048 (Fax)

Jiening Pan

Nankai University ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

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