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Improved inference and estimation in regression with overlapping observations

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Britten-Jones, Mark, Neuberger, Anthony and Nolte, Ingmar. (2011) Improved inference and estimation in regression with overlapping observations. Journal of Business Finance & Accounting, Vol.38 (No.5-6). pp. 657-683. ISSN 0306-686X

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Official URL: http://dx.doi.org/10.1111/j.1468-5957.2011.02244.x

Abstract

We present an improved method for inference in linear regressions with overlapping observations. By aggregating the matrix of explanatory variables in a simple way, our method transforms the original regression into an equivalent representation in which the dependent variables are non-overlapping. This transformation removes that part of the autocorrelation in the error terms which is induced by the overlapping scheme. Our method can easily be applied within standard software packages since conventional inference procedures (OLS-, White-, Newey-West-standard errors) are asymptotically valid when applied to the transformed regression. Through Monte Carlo analysis we show that it performs better in finite samples than the methods applied to the original regression that are in common usage. We illustrate the significance of our method with three empirical applications.

Item Type:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Stocks -- Rate of return -- Research, Regression analysis -- Mathematical models, Autocorrelation (Statistics), Monte Carlo method
Journal or Publication Title:	Journal of Business Finance & Accounting
Publisher:	Wiley-Blackwell Publishing Ltd.
ISSN:	0306-686X
Date:	June 2011
Volume:	Vol.38
Number:	No.5-6
Number of Pages:	27
Page Range:	pp. 657-683
Identification Number:	10.1111/j.1468-5957.2011.02244.x
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/2935