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Out of Sample Predictability in Predictive Regressions with Many Predictor Candidates

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  • Jesus Gonzalo
  • Jean-Yves Pitarakis
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 implemented in a pairwise manner using one predictor at a time and resulting in an aggregate test statistic that is standard normally distributed under the global null hypothesis of no linear predictability. Predictors can be highly persistent, purely stationary or a combination of both. Upon rejection of the null hypothesis we subsequently introduce a predictor screening procedure designed to identify the most active predictors. An empirical application to key predictors of US economic activity illustrates the usefulness of our methods and highlights the important forward looking role played by the series of manufacturing new orders.

Suggested Citation

  • Jesus Gonzalo & Jean-Yves Pitarakis, 2023. "Out of Sample Predictability in Predictive Regressions with Many Predictor Candidates," Papers 2302.02866, arXiv.org, revised Oct 2023.
    • Handle: RePEc:arx:papers:2302.02866
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    References listed on IDEAS

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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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    More about this item

    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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