A persistent regressor and serially correlated errors
You run a predictive regression of next-month returns on the dividend yield, a highly persistent, slow-moving variable. The residuals show clear serial correlation.
Explain why ordinary standard errors mislead here, why Newey-West HAC standard errors are the standard remedy, and what additional small-sample bias you should be aware of.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.