Real‐time detection of regimes of predictability in the US equity premium
Bibliographic Data
| ID | 21653503 |
|---|---|
| Authors | David I Harvey (0000-0002-7504-6885, School of Economics University of Nottingham Nottingham UK), Stephen J Leybourne (School of Economics University of Nottingham Nottingham UK), Robert Sollis (Newcastle University Business School Newcastle Upon Tyne UK), A M Robert Taylor (0000-0003-0567-0276, Essex Business School University of Essex Colchester UK, corresponding author) |
| Year | 2021 |
| Volume | 36 |
| Issue | 1 |
| Pages | 45-70 |
| Publication date | 2021-01-01 |
| Peer Reviewed | Yes |
| Open Access | Yes |
| Type | ARTICLE |
| Venue | Journal of Applied Econometrics (JOURNAL) |
| Journal identifiers | ISSN: 1099-1255 • E-ISSN: 0883-7252 |
| Publisher | Wiley (PUBLISHER • GB) |
| DOI | 10.1002/jae.2794 |
| OpenAlex | W3040970586 |
| Language | EN |
| References cited | 37 |
We propose new real‐time monitoring procedures for the emergence of end‐of‐sample predictive regimes using sequential implementations of standard (heteroskedasticity‐robust) regression t ‐statistics for predictability applied over relatively short time periods. The procedures we develop can also be used for detecting historical regimes of temporary predictability. Our proposed methods are robust to both the degree of persistence and endogeneity of the regressors in the predictive regression and to certain forms of heteroskedasticity in the shocks. We discuss how the monitoring procedures can be designed such that their false positive rate can be set by the practitioner at the start of the monitoring period using detection rules based on information obtained from the data in a training period. We use these new monitoring procedures to investigate the presence of regime changes in the predictability of the US equity premium at the 1‐month horizon by traditional macroeconomic and financial variables, and by binary technical analysis indicators. Our results suggest that the 1‐month‐ahead equity premium has temporarily been predictable, displaying so‐called “pockets of predictability,” and that these episodes of predictability could have been detected in real time by practitioners using our proposed methodology
Econometrics · Economics · Endogeneity · Equity premium puzzle · Heteroscedasticity · Predictability · Risk premium · Statistics · Computer Science · Financial Risk and Volatility Modeling · Market Dynamics and Volatility · Mathematics · Monetary Policy and Economic Impact
Estimating and Testing Linear Models with Multiple Structural Changes
A Comprehensive Look at The Empirical Performance of Equity Premium Prediction
Maximum Likelihood Estimation of Misspecified Models
The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors
Computation and analysis of multiple structural change models
Testing the equality of prediction mean squared errors
Recursive Predictability Tests for Real-Time Data
Tests for Cointegration Breakdown Over a Short Time Period
| Citation velocity | historical |
|---|---|
| Highly cited | No |