Directional predictability of daily equity returns

March 3, 2018

A new empirical paper provides evidence that the direction of daily equity returns in the Dow Jones has been predictable over the past 15 years, based on conventional short-term factors and out-of-sample selection and forecasting methods. Hit ratios have been 51-52%. The predictability has been statistically significant and consistent over time. Trading returns based on forecasting have been economically meaningful. Simple forecasting methods have outperformed more complex machine learning.

(more…)

Statistical remedies against macro information overload

February 4, 2017

“Dimension reduction” condenses the information content of a multitude of data series into small manageable set of factors or functions. This reduction is important for forecasting with macro variables because many data series have only limited and highly correlated information content. There are three types of statistical methods.The first type selects a subset of “best” explanatory variables (view post here). The second type selects a small set of latent background factors of all explanatory variables and then uses these background factors for prediction (Dynamic Factor Models). The third type generates a small set of functions of the original explanatory variables that historically would have retained their explanatory power and then deploys these for forecasting (Sufficient Dimension Reduction).

(more…)

Selecting macro factors for trading strategies

September 17, 2016

A powerful statistical method for selecting macro factors for trading strategies is the “Elastic Net”. The method simultaneously selects factors in accordance with their past predictive power and estimates their influence conservatively in order to contain the influence of accidental correlation. Unlike other statistical selection methods, such as “LASSO”, the “Elastic Net” can make use of a large number of correlated factors, a typical feature of economic time series.

(more…)

Tags

Tags
Research
Quantamental Academy
About Us
Macro-quantamental investment handbook