A Note on Nonsense Predictive Regressions Arising from Structural Breaks
9 Pages Posted: 3 Aug 2006
Date Written: July 31, 2006
In this short note we respond to the argument advanced by Baker, Taliaferro, and Wurgler (2006) that our criticism of the market timing literature is simply a reinterpretation of Stambaugh's (1999) small sample bias. We show analytically how structural breaks in an economic time-series may result in spurious, or nonsense, predictive regressions, whether or not there is any small-sample bias at play. We also provide a simple example showing that the magnitude of this bias could explain the predictive power of certain variables.
Keywords: Market Timing, Spurious Regressions
JEL Classification: G14, G32
Suggested Citation: Suggested Citation