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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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    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.


    Item Type: Monograph (Working Paper)
    School: School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Research Centres and Institutes: Applied Macroeconomics, Birkbeck Centre for
    Depositing User: Sarah Hall
    Date Deposited: 13 May 2014 10:12
    Last Modified: 10 Jun 2021 09:33


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