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Please use this identifier to cite or link to this item: http://hdl.handle.net/2451/26317

Title: Predictive Regressions: A Reduced-Bias Estimation Method
Authors: Amihud, Yakov
Hurvich, Clifford M.
Keywords: Stock Returns
Dividend Yields
Autoregressive Models
Issue Date: 4-May-2004
Publisher: Stern School of Business, New York University
Series/Report no.: SOR-2004-1
Abstract: Standard predictive regressions produce biased coefficient estimates in small samples when the regressors are Gaussian first-order autoregressive with errors that are correlated with the error series of the dependent variable; see Stambaugh (1999) for the single-regressor model. This paper proposes a direct and convenient method to obtain reduced-bias estimators for single and multiple regressor models by employing an augmented regression, adding a proxy for the errors in the autoregressive model. We derive bias expressions for both the ordinary least squares and our reduced-bias estimated coefficients. For the standard errors of the estimated predictive coefficients we develop a heuristic estimator which performs well in simulations, for both the single-predictor model and an important specification of the multiple-predictor model. The effectiveness of our method is demonstrated by simulations and by empirical estimates of common predictive models in finance. Our empirical results show that some of the predictive variables that were significant under ordinary least squares become insignificant under our estimation procedure.
URI: http://hdl.handle.net/2451/26317
Appears in Collections:IOMS: Statistics Working Papers

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