Heavy tails of OLS |
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Authors: | Thomas Mikosch Casper G de Vries |
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Institution: | 1. Department of Mathematics, Universitetsparken 5, University of Copenhagen, Copenhagen, DK-2100, Denmark;2. Department of Economics, Erasmus University Rotterdam, Rotterdam, NL-3000, The Netherlands |
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Abstract: | Suppose the tails of the noise distribution in a regression exhibit power law behavior. Then the distribution of the OLS regression estimator inherits this tail behavior. This is relevant for regressions involving financial data. We derive explicit finite sample expressions for the tail probabilities of the distribution of the OLS estimator. These are useful for inference. Simulations for medium sized samples reveal considerable deviations of the coefficient estimates from their true values, in line with our theoretical formulas. The formulas provide a benchmark for judging the observed highly variable cross country estimates of the expectations coefficient in yield curve regressions. |
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Keywords: | C13 C16 C20 |
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