Biases in Long-Horizon Predictive Regressions

41 Pages Posted: 22 Jun 2020 Last revised: 25 May 2022

See all articles by Jacob Boudoukh

Jacob Boudoukh

Interdisciplinary Center (IDC) Herzliyah; AQR Capital Management, LLC

Ronen Israel

AQR Capital Management, LLC

Matthew P. Richardson

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); AQR Capital Management, LLC

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Date Written: June 2020

Abstract

Analogous to Stambaugh (1999), this paper derives the small sample bias of estimators in J-horizon predictive regressions, providing a plug-in adjustment for these estimators. A number of surprising results emerge, including (i) a higher bias for overlapping than nonoverlapping regressions despite the greater number of observations, and (ii) particularly higher bias for an alternative long-horizon predictive regression commonly advocated for in the literature. For large J, the bias is linear in (J/T) with a slope that depends on the predictive variable’s persistence. The bias adjustment substantially reduces the existing magnitude of long-horizon estimates of predictability.

Suggested Citation

Boudoukh, Jacob and Israel, Ronen and Richardson, Matthew P., Biases in Long-Horizon Predictive Regressions (June 2020). NBER Working Paper No. w27410, Available at SSRN: https://ssrn.com/abstract=3632637

Jacob Boudoukh (Contact Author)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Ronen Israel

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Matthew P. Richardson

New York University (NYU) - Department of Finance ( email )

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AQR Capital Management, LLC ( email )

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