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March 2009 Assessing multivariate predictors of financial market movements: A latent factor framework for ordinal data
Philippe Huber, Olivier Scaillet, Maria-Pia Victoria-Feser
Ann. Appl. Stat. 3(1): 249-271 (March 2009). DOI: 10.1214/08-AOAS213

Abstract

Much of the trading activity in Equity markets is directed to brokerage houses. In exchange they provide so-called “soft dollars,” which basically are amounts spent in “research” for identifying profitable trading opportunities. Soft dollars represent about USD 1 out of every USD 10 paid in commissions. Obviously they are costly, and it is interesting for an institutional investor to determine whether soft dollar inputs are worth being used (and indirectly paid for) or not, from a statistical point of view. To address this question, we develop association measures between what broker–dealers predict and what markets realize. Our data are ordinal predictions by two broker–dealers and realized values on several markets, on the same ordinal scale. 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. The method is then used to analyze our dataset.

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Philippe Huber. Olivier Scaillet. Maria-Pia Victoria-Feser. "Assessing multivariate predictors of financial market movements: A latent factor framework for ordinal data." Ann. Appl. Stat. 3 (1) 249 - 271, March 2009. https://doi.org/10.1214/08-AOAS213

Information

Published: March 2009
First available in Project Euclid: 16 April 2009

zbMATH: 1160.62090
MathSciNet: MR2668707
Digital Object Identifier: 10.1214/08-AOAS213

Keywords: factor analysis , forecasts , generalized linear model , LAMLE , Laplace approximation , latent variable , multinomial logit

Rights: Copyright © 2009 Institute of Mathematical Statistics

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Vol.3 • No. 1 • March 2009
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