Why Long Horizons: A Study of Power Against Persistent Alternatives
NBER Technical Working Paper No. 142
This paper studies tests of predictability in regressions with a given AR(1) regressor and an asset return dependent variable measured over a short or long horizon. The paper shows that when there is a persistent predictable component in the return, an increase in the horizon may increase the R2 statistic of the regression and the approximate slope of a predictability test. Mone Carlo experiments show that long-horizon regression tests have serious size distortions when asymptotic critical values are used, but some versions of such tests have power advantages remaining after size is corrected.
Document Object Identifier (DOI): 10.3386/t0142
Published: Campbell, John Y. "Why Long Horizons? A Study Of Power Against Persistent Alternatives," Journal of Empirical Finance, 2001, v8(5,Dec), 459-491.