Predictable Stock Returns: The Role of Small Sample Bias

Predictable Stock Returns: The Role of Small Sample Bias ABSTRACT Predictive regressions are subject to two small sample biases: the coefficient estimate is biased if the predictor is endogenous, and asymptotic standard errors in the case of overlapping periods are biased downward. Both biases work in the direction of making t‐ratios too large so that standard inference may indicate predictability even if none is present. Using annual returns since 1872 and monthly returns since 1927 we estimate empirical distributions by randomizing residuals in the VAR representation of the variables. The estimated biases are large enough to affect inference in practice, and should be accounted for when studying predictability. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Predictable Stock Returns: The Role of Small Sample Bias

The Journal of Finance, Volume 48 (2) – Jun 1, 1993

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Publisher
Wiley
Copyright
1993 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
D.O.I.
10.1111/j.1540-6261.1993.tb04731.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT Predictive regressions are subject to two small sample biases: the coefficient estimate is biased if the predictor is endogenous, and asymptotic standard errors in the case of overlapping periods are biased downward. Both biases work in the direction of making t‐ratios too large so that standard inference may indicate predictability even if none is present. Using annual returns since 1872 and monthly returns since 1927 we estimate empirical distributions by randomizing residuals in the VAR representation of the variables. The estimated biases are large enough to affect inference in practice, and should be accounted for when studying predictability.

Journal

The Journal of FinanceWiley

Published: Jun 1, 1993

References

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