NBER

Ronen Israel

AQR Capital
Two Greenwich Plaza--3rd floor
Greenwich, CT 06830

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Institutional Affiliation: AQR Capital

NBER Working Papers and Publications

June 2020Biases in Long-Horizon Predictive Regressions
with Jacob Boudoukh, Matthew P. Richardson: w27410
Analogous to Stambaugh (1999), this paper derives the small sample bias of estimators in J-horizon predictive regressions, providing a plug-in adjustment for these estimators. A number of surprising results emerge, including (i) a higher bias for overlapping than nonoverlapping regressions despite the greater number of observations, and (ii) particularly higher bias for an alternative long-horizon predictive regression commonly advocated for in the literature. For large J, the bias is linear in (J/T) with a slope that depends on the predictive variable’s persistence. The bias adjustment substantially reduces the existing magnitude of long-horizon estimates of predictability.

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