Nonparametric Retrospection and Monitoring of Predictability of Financial Returns

35 Pages Posted: 21 Jul 2006 Last revised: 17 Sep 2008

Date Written: August 24, 2007

Abstract

We develop and evaluate sequential testing tools for a class of nonparametric tests for predictability of financial returns that includes, in particular, the directional accuracy and excess profitability tests. Our sequential methods consider in a unified framework both retrospection of a historical sample and monitoring newly arriving data. To this end, we focus on linear monitoring boundaries that are continuations of horizontal lines corresponding to retrospective critical values, elaborating on both two-sided and one-sided testing. We run a simulation study and illustrate the methodology by testing for directional and mean predictability of returns in young stock markets in Eastern Europe.

Keywords: Predictability testing, sequential tests, retrospection, monitoring, stock indexes

JEL Classification: C12, C22, C52, C53

Suggested Citation

Anatolyev, Stanislav, Nonparametric Retrospection and Monitoring of Predictability of Financial Returns (August 24, 2007). Journal of Business and Economic Statistics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=918201 or http://dx.doi.org/10.2139/ssrn.918201

Stanislav Anatolyev (Contact Author)

New Economic School ( email )

Skolkovskoe shosse, 45
Moscow, 121353
Russia

CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

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