Search Results
Working Paper
A note on the estimation of linear regression models with Heteroskedastic measurement errors
I consider the estimation of linear regression models when the independent variables are measured with errors whose variances differ across observations, a situation that arises, for example, when the explanatory variables in a regression model are estimates of population parameters based on samples of varying sizes. Replacing the error variance that is assumed common to all observations in the standard errors-in-variables estimator by the mean measurement error variance yields a consistent estimator in the case of measurement error heteroskedasticity. However, another estimator, which I call ...
Working Paper
Confidence intervals for long-horizon predictive regressions via reverse regressions
Long-horizon predictive regressions in finance pose formidable econometric problems when estimated using the sample sizes that are typically available. A remedy that has been proposed by Hodrick (1992) is to run a reverse regression in which short-horizon returns are projected onto a long-run mean of some predictor. By covariance stationarity, the slope coefficient is zero in the reverse regression if and only if it is zero in the original regression, but testing the hypothesis in the reverse regression avoids small sample problems. Unfortunately this only allows us to test the null of no ...
Working Paper
Trend-reverting fluctuations in the life-cycle model
Aggregate time series provide evidence of short term dynamic adjustment that appears to be governed by complex or negative real eigenvalues. This finding is at odds with the predictions of reasonably parameterized, convex one-sector growth models with complete markets. We study life cycle economies in which aggregate saving depends non-trivially on the distribution of wealth among cohorts. If consumption goods are weak gross substitutes near the steady state price vector, we prove that the unique equilibrium of a life cycle exchange economy converges to the unique non-monetary steady state ...
Working Paper
Superneutrality in postwar economies
A structural vector autoregression is employed to estimate the real output level response to permanent inflation shocks. We identify the model by assuming that in the long run, inflation is a monetary phenomenon. Well-known economic theory is used to establish this identification restriction. The model is estimated for a sample of 16 countries from the larger pool based on data quality, existence of long uninterrupted series on output and inflation, and evidence that the country experienced permanent shocks to inflation and output. The VAR is estimated for each country separately. We find ...
Report
Pricing the term structure with linear regressions
We estimate the time series and cross section of bond returns by way of three-stage ordinary least squares, which we label dynamic Fama-MacBeth regressions. Our approach allows for estimation of models with a large number of pricing factors. Even though we do not impose yield cross-equation restrictions in the estimation, we show that our bond return regressions generate a term structure of interest rates with small yield errors when compared with commonly reported specifications. We uncover specifications that give rise to lower pricing errors than do commonly advocated specifications, both ...
Discussion Paper
Understanding hedge fund alpha using improved replication methodologies
In this paper, we estimate alpha for major hedge fund indexes. To set the stage, we examine several alternative methods for replicating Hedge Fund Research Inc. hedge fund indexes. The replication methods include stepwise regression, variations of the lasso shrinkage method, principal component regression, partial least squares regression, and dynamic linear regression. We find that the lasso methods and dynamic regression are superior for generating hedge fund replications and that the performance of the replications corresponds closely to that of the respective actual indexes. Using these ...
Working Paper
Maximum-likelihood estimation of fractional cointegration with application to the short end of the yield curve
We estimate a multivariate autoregressive fractionally-integrated moving-average (ARFIMA) model to illustrate a cointegration testing methodology based on joint estimates of the fractional orders of integration of a cointegrating vector and its parent series. Although previous work has recognized that deviations from long-run relationships could exhibit long memory and go undetected in traditional 1(1)/i (0) cointegration analysis, previous tests for fractional cointegration relied on a two-step testing procedure and maintained the assumption in the second step that the parent series were ...
Working Paper
A note on the coefficient of determination in models with infinite variance variables
Since the seminal work of Mandelbrot (1963), alpha-stable distributions with infinite variance have been regarded as a more realistic distributional assumption than the normal distribution for some economic variables, especially financial data. After providing a brief survey of theoretical results on estimation and hypothesis testing in regression models with infinite-variance variables, we examine the statistical properties of the coefficient of determination in models with alpha-stable variables. If the regressor and error term share the same index of stability alpha