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New Methods for Inference in Long-Horizon Regressions

Published online by Cambridge University Press:  18 February 2011

Erik Hjalmarsson*
Queen Mary, University of London, School of Economics and Finance, Mile End Road, London E1 4NS, UK.


I develop new results for long-horizon predictive regressions with overlapping observations. I show that rather than using autocorrelation 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. Further, when the regressors are persistent and endogenous, the long-run ordinary least squares (OLS) estimator suffers from the same problems as 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. An empirical application to stock return predictability shows that, contrary to many popular beliefs, evidence of predictability does not typically become stronger at longer forecasting horizons.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2011

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