Regime-specific predictability in predictive regressions Articles uri icon

publication date

  • May 2012

start page

  • 229

end page

  • 241


  • 2


  • 30

International Standard Serial Number (ISSN)

  • 0735-0015

Electronic International Standard Serial Number (EISSN)

  • 1537-2707


  • Predictive regressions are linear specifications linking a noisy variable such as stock returns to past values of a very persistent regressor with the aim of assessing the presence of predictability. Key complications that arise are the potential presence of endogeneity and the poor adequacy of asymptotic approximations. In this article, we develop tests for uncovering the presence of predictability in such models when the strength or direction of predictability may alternate across different economically meaningful episodes. An empirical application reconsiders the dividend yield-based return predictability and documents a strongpredictability that is countercyclical, occurring solely during bad economic times. This article has online supplementary materials