Document Type
Article
Publication Date
10-25-2012
Publication Title
Econometric Reviews
Volume
32
Issue
3
First Page
318
Last Page
360
Abstract
Predictability tests with long memory regressors may entail both size distortion and incompatibility between the orders of integration of the dependent and independent variables. Addressing both problems simultaneously, this paper proposes a two-step procedure that rebalances the predictive regression by fractionally differencing the predictor based on a first-stage estimation of the memory parameter. Extensive simulations indicate that our procedure has good size, is robust to estimation error in the first stage, and can yield improved power over cases in which an integer order is assumed for the regressor. We also extend our approach beyond the standard predictive regression context to cases in which the dependent variable is also fractionally integrated, but not cointegrated with the regressor. We use our procedure to provide a valid test of forward rate unbiasedness that allows for a long memory forward premium.
Recommended Citation
Maynard, Alex; Smallwood, Aaron; and Wohar, Mark E., "Long Memory Regressors and Predictive Regressions: A two-stage rebalancing approach" (2012). Economics Faculty Publications. 71.
https://digitalcommons.unomaha.edu/econrealestatefacpub/71
Comments
This is an original manuscript / preprint of an article published by Taylor & Francis in Econometric Reviews on 25 October 2012, available online: https://www.tandfonline.com/doi/full/10.1080/07474938.2012.690663?scroll=top&needAccess=true.