On 4pm, April 13th, Professor Jean-Yves Pitarakis, the head of Department of Economics, University of Southampton visit our school and gave a seminar titled "Episodic Predictability in Predictive Regressions".His research interests are in theoretical and applied econometrics and his current research agenda on episodic predictability in models with persistent predictors is funded by an ESRC individual research grant.
Predictive regressions are linear speci cations linking noisy variables such as stock returns
to past values of a more persistent regressor (e.g. Dividend Yields, Price to Earnings ratios)
with the aim of assessing the presence of predictability. This talk will discuss extensions of
this framework to a nonlinear setting with threshold e ects designed to capture the idea that
the strength of predictability may alternate across economically meaningful episodes such as
expansions and recessions. We will introduce a series of new test statistics designed to detect
the presence of regime speci c predictability induced by a persistent predictor without imposing
any restrictions on the remaining parameters of the model (e.g. the intercepts may or may not
be a ected by changes in regime). One interesting feature of our setting is that our test statistics
remain una ected by whether some nuisance parameters are identi ed or not. We subsequently
apply our methodology to the predictability of aggregate stock returns with valuation ratios and
document a robust countercyclicality in the ability of some valuation ratios to predict returns.
[joint work with Jesus Gonzalo (Universidad Carlos III of Madrid)]