Nearly Optimal Test for Long Run Predictability with Nearly Integrated Regressors
60 Pages Posted: 24 Mar 2018 Last revised: 18 Jun 2020
Date Written: January 20, 2020
Abstract
We develop a method for long-run predictability testing in series Y by a persistent series X. We consider a class of tests based on the long-run behavior of these series that are robust to short-run dynamics and attempt to attain the highest possible power. The test is based on the Whittle approximation to the likelihood ratio that is adjusted to remain accurate across a range of persistence in X. We verify the properties of this test in small simulations and compare this test against a group of recently proposed methods.
Keywords: long-run predictability, frequency domain
JEL Classification: C12, C53, E37
Suggested Citation: Suggested Citation