The Stambaugh bias in panel predictive regressions

Description

"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"--Federal Reserve Board web site.

Subjects

Series Statement

• International finance discussion papers -- no. 914
• International finance discussion papers (Online) -- no. 914.

Links

• http://www.federalreserve.gov/pubs/ifdp/2007/914/default.htm
• URL