Essays in Financial Economics and Econometrics
Contributors: Stock, James H.; Campbell, John Y.; Coval, Joshua D.
Published: 2012
Language: eng
Description: In the first essay, I study the power of predictive regressions in a world of forecastable returns and find it to be quite poor. Using a simple model, I investigate the properties of short- and long-horizon regressions. The mechanisms biasing coefficients in short-horizon regressions differ from those affecting longer horizons. Further, I demonstrate that R²s are biased and give an estimable bias correction. A calibration exercise shows sample lengths will be insufficient to determine what predicts asset returns until beyond the year 2100. The problem is not isolated to highly persistent predictors; even modestly persistent predictors have difficulties. Further, long-horizon regressions have inferior power relative to their single-period counterparts. These results present a predicament. If return predictability exists, then our ability to identify its source using predictive regressions alone is exceedingly poor.
Notes: Keywords: Asset Pricing, Dynamic Factor Models, Money Market Mutual Funds, Option Pricing, Predictive Regressions, Time Series Econometrics.

Thesis Ph.D. Harvard University 2012