The Stambaugh Bias In Panel Predictive Regressions

Download or read book The Stambaugh Bias in Panel Predictive Regressions written by Erik Hjalmarsson and published by . This book was released on 2007 with total page 26 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes predictive regressions in a panel data setting. The standard fixed effects estimator suffers from a small sample bias, which is the analogue of the Stambaugh bias in time-series predictive regressions. Monte Carlo evidence shows that the bias and resulting size distortions can be severe. A new bias-corrected estimator is proposed, which is shown to work well in finite samples and to lead to approximately normally distributed t-statistics. Overall, the results show that the econometric issues associated with predictive regressions when using time-series data to a large extent also carry over to the panel case. The results are illustrated with an application to predictability in international stock indices.