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    Stambaugh correlations, monkey econometricians and redundant predictors

    Wright, Stephen and Robertson, D. (2011) Stambaugh correlations, monkey econometricians and redundant predictors. Working Paper. Birkbeck, University of London, London, UK.

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    Abstract

    We consider inference in a widely used predictive model in empirical finance. "Stambaugh Bias" arises when innovations to the predictor variable are correlated with those in the predictive regression. We show that high values of the "Stambaugh Correlation" will arise naturally if the predictor is actually predictively redundant, but emerged from a randomised search by data mining econometricians. For such predictors even bias-corrected conventional tests will be severely distorted. We propose tests that distinguish well between redundant predictors and the true (or "perfect") predictor. An application of our tests does not reject the null that a range of predictors of stock returns are redundant.

    Metadata

    Item Type: Monograph (Working Paper)
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centre: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Sarah Hall
    Date Deposited: 13 May 2014 10:12
    Last Modified: 07 Dec 2016 14:53
    URI: http://eprints.bbk.ac.uk/id/eprint/9725

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