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Lookup NU author(s): Professor Robert Sollis
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
We propose new real-time monitoring procedures for the emergence of end-of-sample predictive regimes using sequential implementations of standard (heteroskedasticity-robust) regression t-statistics for predictability applied over relatively short time periods. The procedures we develop can also be used for detecting historical regimes of temporary predictability. Our proposed methods are robust to both the degree of persistence and endogeneity of the regressors in the predictive regression and to certain forms of heteroskedasticity in the shocks. We discuss how the monitoring procedures can be designed such that their false positive rate can be set by the practitioner at the start of the monitoring period using detection rules based on information obtained from the data in a training period. We use these new monitoring procedures to investigate the presence of regime changes in the predictability of the U.S. equity premium at the one-month horizon by traditional macroeconomic and financial variables, and by binary technical analysis indicators. Our results suggest that the one-month ahead equity premium has temporarily been predictable, displaying so-called `pockets of predictability', and that these episodes of predictability could have been detected in real-time by practitioners using our proposed methodology.
Author(s): Harvey DI, Leybourne SJ, Sollis R, Taylor AMR
Publication type: Article
Publication status: Published
Journal: Journal of Applied Econometrics
Print publication date: 10/02/2021
Online publication date: 06/07/2020
Acceptance date: 01/06/2020
Date deposited: 16/06/2020
ISSN (print): 0883-7252
ISSN (electronic): 1099-1255
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