Predictive Regression with Order-P Autoregressive Predictor

36 Pages Posted: 6 Jan 2010

See all articles by Yakov Amihud

Yakov Amihud

New York University - Stern School of Business

Clifford M. Hurvich

Stern School of Business, New York University; New York University (NYU) - Department of Information, Operations, and Management Sciences

Yi Wang

New York University (NYU) - Department of Information, Operations, and Management Sciences

Date Written: December 2009

Abstract

Studies of predictive regressions analyze the case where yt is predicted by xt-1 with xt being first-order autoregressive, AR(1). Under some conditions, the OLS- estimated predictive coefficient is known to be biased. We analyze a predictive model where yt is predicted by xt-1, xt-2,... xt-p with xt being autoregressive of order p, AR(p) with p > 1. We develop a generalized augmented regression method that produces a reduced-bias point estimate of the predictive coefficients and derive an appropriate hypothesis testing procedure. We apply our method to the prediction of quarterly stock returns by dividend yield, which is apparently AR(2). Using our method results in the AR(2) predictor series having insignificant effect, although under OLS, or the commonly assumed AR(1) structure, the predictive model is significant. We also generalize our method to the case of multiple AR(p) predictors.

Keywords: autoregressive, augmented regression method (ARM)

Suggested Citation

Amihud, Yakov and Hurvich, Clifford M. and Wang, Yi, Predictive Regression with Order-P Autoregressive Predictor (December 2009). NYU Working Paper No. 2451/28470. Available at SSRN: https://ssrn.com/abstract=1532086

Yakov Amihud (Contact Author)

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-190
New York, NY 10012-1126
United States
212-998-0720 (Phone)
212-995-4233 (Fax)

Clifford M. Hurvich

Stern School of Business, New York University ( email )

44 West 4th Street
New York, NY 10012-1126
United States

New York University (NYU) - Department of Information, Operations, and Management Sciences

44 West Fourth Street
New York, NY 10012
United States

Yi Wang

New York University (NYU) - Department of Information, Operations, and Management Sciences ( email )

44 West Fourth Street
New York, NY 10012
United States

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