Political Regimes, Business Cycles, Seasonalities, and Returns

61 Pages Posted: 17 Jun 2006 Last revised: 22 Dec 2008

See all articles by John G. Powell

John G. Powell

Massey University - Department of Finance Banking and Property

Jing Shi

Macquarie University

Tom Smith

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Robert E. Whaley

Vanderbilt University - Finance

Date Written: December 17, 2008

Abstract

This paper provides a method for testing for regime differences when regimes are long-lasting. Standard testing procedures are generally inappropriate because regime persistence causes a spurious regression problem - a problem that has led to incorrect inference in a broad range of studies involving regimes representing political, business, and seasonal cycles. The paper outlines analytically how standard estimators can be adjusted for regime dummy variable persistence. While the adjustments are helpful asymptotically, spurious regression remains a problem in small samples and must be addressed using simulation or bootstrap procedures. We provide a simulation procedure for testing hypotheses in situations where an independent variable in a time-series regression is a persistent regime dummy variable. We also develop a procedure for testing hypotheses in situations where the dependent variable has similar properties.

Keywords: persistent regimes, regime difference tests, spurious regression, dummy variable

JEL Classification: G12, C15, C22

Suggested Citation

Powell, John G. and Shi, Jing and Smith, Tom M. and Whaley, Robert E., Political Regimes, Business Cycles, Seasonalities, and Returns (December 17, 2008). Available at SSRN: https://ssrn.com/abstract=909576 or http://dx.doi.org/10.2139/ssrn.909576

John G. Powell

Massey University - Department of Finance Banking and Property ( email )

Private Bag 11 222
Massey University
Palmerston North, 4442
New Zealand

Jing Shi

Macquarie University ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/jing-shi

Tom M. Smith

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN) ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Robert E. Whaley (Contact Author)

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States
615-343-7747 (Phone)
615-376-8879 (Fax)

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