Halbert White Jr. memorial JFEC lecture: pitfalls and possibilities in predictive regression

phillips. b, peter c;

Financial theory and econometric methodology both struggle in
formulating models that are logically sound in reconciling short-run
martingale behavior for financial assets with predictable long-run
behavior, leaving much of the research to be empirically driven. The
present article overviews recent contributions to this subject, focusing on the main pitfalls in conducting predictive regression and on some of the possibilities offered by modern econometric methods. The latter options include indirect inference and techniques of endogenous instrumentation that use convenient temporal transforms of persistent regressors. Some additional suggestions are made for bias elimination, quantile crossing amelioration, and control of predictive model misspecification