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A latent factor model for ordinal data to measure multivariate predictive ability of financial market movements

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Author Info
Philippe HUBER (University of Geneva, HEC and FAME)
Olivier SCAILLET (University of Geneva, HEC and FAME)
Maria-Pia VICTORIA-FESER (University of Geneva, HEC and FAME)

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Abstract

In 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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Publisher Info
Paper provided by International Center for Financial Asset Management and Engineering in its series FAME Research Paper Series with number rp159.

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Date of creation: Oct 2005
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Handle: RePEc:fam:rpseri:rp159

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Related research
Keywords: 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: General - - - Hypothesis Testing
C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Estimation
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 and Testing
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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