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Nonparametric Retrospection and Monitoring of Predictability of Financial Returns

  • Anatolyev, Stanislav

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. We consider both the retrospective context where a researcher wants to track predictability over time in a historical sample, and the monitoring context where a researcher conducts testing as new observations arrive. Throughout, we elaborate on both two-sided and one-sided testing, focusing on linear monitoring boundaries that are continuations of horizontal lines corresponding to retrospective critical values. We illustrate our methodology by testing for directional and mean predictability of returns in a dozen of young stock markets in Eastern Europe.

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Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 27 (2009)
Issue (Month): 2 ()
Pages: 149-160

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Handle: RePEc:bes:jnlbes:v:27:i:2:y:2009:p:149-160
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  1. Peter C.B. Phillips & Steven N. Durlauf, 1985. "Multiple Time Series Regression with Integrated Processes," Cowles Foundation Discussion Papers 768, Cowles Foundation for Research in Economics, Yale University.
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