A trading approach to testing for predictability

Citation:

Anatolyev, Stanislav and Alexander Gerko (2005) "A trading approach to testing for predictability", Journal of Business and Economic Statistics, Vol. 23, No. 4, pp. 455461

Abstract:

We propose a market timing test for conditional mean independence of financial returns. The new excess predictability (EP) test statistic has an interpretation of a properly normalized return of a certain trading strategy. We discuss similarities of the EP test to the popular directional accuracy (DA) test of Pesaran and Timmermann (Journal of Business and Economic Statistics, 1992). Power properties of the EP test are advantageous, and size properties are comparable to those of the DA test. We illustrate application of the test using weekly data on the S&P500 index.

Paper in RePEc:

Journal of Business and Economic Statistics

Paper in accepted version:

Profit.pdf

Data used in the paper:

S&P500 returns

Presented at:

Workshop "Econometric Time Series Analysis - Methods and Applications", Johannes Kepler Universitt, Linz, Austria, September 29 - October 1, 2003 (by Alexander Gerko)
XIV New Economic School research conference, Moscow, Russia, October 9-11, 2003

Cited by:

Kozhan, R. and Salmon, M. (2012) "The information content of a limit order book: The case of an FX market", Journal of Financial Markets, 15, 1-28.
Lim, K. and Brooks, R. (2011) "Forecasting the direction of the US stock market with dynamic binary probit models", Journal of Economic Surveys, vol. 25, pp. 69-108.
Kozhan, R. and Salmon, M. (2009) "Uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation", Journal of Economic Dynamics and Control, 33, 1106-1122.