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Nonparametric testing for long-horizon predictability with persistent covariates. (English) Zbl 1359.62146
Summary: We propose a testing procedure for long-horizon predictability via kernel-based nonparametric estimators of long-run covariances between multiperiod returns and persistent covariates. Asymptotic properties of the proposed tests are studied. As for implementation of the test, sieve bootstrap methods are employed to obtain reasonable approximation to the sample distribution of the test statistics. Monte Carlo simulations are conducted to verify the theoretical conjecture. Empirical analysis, using US monthly data from 1929 to 2011, are presented for testing stock return predictability of some forecasting financial variables. Long-term interest rates, unlike default spreads or price-earning ration, are found to show some forecasting power.
MSC:
62G10 Nonparametric hypothesis testing
62G08 Nonparametric regression and quantile regression
62G20 Asymptotic properties of nonparametric inference
62M10 Time series, auto-correlation, regression, etc. in statistics (GARCH)
62P20 Applications of statistics to economics
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