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Out of sample predictability in predictive regressions with many predictor candidates

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  • Pitarakis, Jean-Yves

Abstract

This paper is concerned with detecting the presence of out of sample predictability in linear predictive regressions with a potentially large set of candidate predictors. We propose a procedure based on out of sample MSE comparisons that is implementedin a pairwise manner using one predictor at a time and resulting in an aggregate test statistic that is standard normally distributed under the none hypothesis of no linear predictability. Predictors can be highly persistent, purely stationary or a combination of both. Upon rejection of the none hypothesis we subsequently introduce a predictor screening procedure designed to identify the most active predictors.

Suggested Citation

  • Pitarakis, Jean-Yves, 2020. "Out of sample predictability in predictive regressions with many predictor candidates," UC3M Working papers. Economics 31554, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:31554
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    1. Christis Katsouris, 2023. "High Dimensional Time Series Regression Models: Applications to Statistical Learning Methods," Papers 2308.16192, arXiv.org.

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    Keywords

    Forecasting;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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