A latent factor model for ordinal data to measure multivariate predictive ability of financial market movements
AbstractIn this paper we develop a structural equation model with latent variables in an ordinal setting which allows us to test broker-dealer predictive ability of financial market movements. We use a multivariate logit model in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments reveal that both the estimation method and the testing procedure perform well in small samples. An empirical illustration is given for mid-term forecasts simultaneously made by two broker-dealers for several countries.
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Bibliographic InfoPaper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp159.
Date of creation: Oct 2005
Date of revision:
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structural equation model; latent variable; generalised linear model; factor analysis; multinomial logit; forecasts; LAMLE; canonical correlation;
Find related papers by JEL classification:
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
- C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-02-12 (All new papers)
- NEP-BEC-2006-02-12 (Business Economics)
- NEP-DCM-2006-02-12 (Discrete Choice Models)
- NEP-ECM-2006-02-12 (Econometrics)
- NEP-FIN-2006-02-12 (Finance)
- NEP-FOR-2006-02-12 (Forecasting)
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