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International Finance Discussion Papers
The International Finance Discussion Papers logo links to the International Finance Discussion Papers home page Inference in Long-Horizon Regressions
Erik Hjalmarsson
2006-853  (January 2006, latest version October 2008)

Abstract:  I develop new results for long-horizon predictive regressions with overlapping observations. I show that rather than using auto-correlation robust standard errors, the standard t-statistic can simply be divided by the square root of the forecasting horizon to correct for the effects of the overlap in the data; this is asymptotically an exact correction and not an approximate result. Further, when the regressors are persistent and endogenous, the long-run OLS estimator suffers from the same problems as does the short-run OLS estimator, and it is shown how similar corrections and test procedures as those proposed for the short-run case can also be implemented in the long-run. New results for the power properties of long-horizon tests are also developed. The theoretical results are illustrated with an application to long-run stock-return predictability, where it is shown that once correctly sized tests are used, the evidence of predictability is generally much stronger at short rather than long horizons.

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Predictive regressions, long-horizon regressions, stock return predictability

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