Abstract: We propose a robust inference method for predictive regression models under heterogeneously persistent volatility as well as endogeneity, persistence, or heavy-tailedness of regressors. This approach relies on two methodologies, nonlinear instrumental variable estimation and volatility correction, which are used to deal with the aforementioned characteristics of regressors and volatility, respectively. Our method is simple to implement and is applicable both in the case of continuous and discrete time models. According to our simulation study, the proposed method performs well compared with widely used alternative inference procedures in terms of its finite sample properties in various dependence and persistence settings observed in real-world financial and economic markets. Link to work
doi: https://doi.org/10.1017/S0266466623000117