Extensions to IVX methods of inference for return predictability

Matei Demetrescu, Iliyan Georgiev, Paulo M.M. Rodrigues, A. M.Robert Taylor

Research output: Contribution to journalArticlepeer-review

Abstract

The contribution of this paper is threefold. First, we demonstrate that, provided either a suitable bootstrap implementation is employed or heteroskedasticity-consistent standard errors are used, the IVX-based predictability tests of Kostakis et al. (2015) retain asymptotically valid inference under the null hypothesis under considerably weaker assumptions on the innovations than are required by Kostakis et al. (2015). Second, under the same assumptions, we develop asymptotically valid bootstrap implementations of the IVX tests. Monte Carlo simulations show that the bootstrap tests deliver considerably more accurate finite sample inference than the asymptotic implementations of the tests under certain problematic parameter constellations, most notably for one-sided testing, and where multiple predictors are included. Third, we show how sub-sample implementations of the IVX approach can be used to develop asymptotically valid one-sided and two-sided tests for the presence of temporary windows of predictability.

Original languageEnglish
JournalJournal of Econometrics
DOIs
Publication statusAccepted/In press - 18 Apr 2022

Keywords

  • (Un)conditional heteroskedasticity
  • Endogeneity
  • IVX estimation
  • Predictive regression
  • Residual wild bootstrap
  • Subsample tests
  • Unknown regressor persistence

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