Small Sample Bias in Panel Data

Abstract

There exists a small sample bias in predictive regressions, when a rate of return is regressed on a lagged stochastic regressor, and the regression disturbance is correlated with the regressors’ innovations. Although this bias can be a serious concern in time-series predictive regressions, it is not significant in panel data setting. By using simulations and stock level data, we document that as the number of cross sections used in the panel data increases the bias in coefficient estimates becomes negligible.