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Addendum to 'the Analysis of a Momentum Model and Accompanying Portfolio Strategies'

# Addendum to 'the Analysis of a Momentum Model and Accompanying Portfolio Strategies'

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Statistical tests; portfolio performance statistics; R
Statistical tests; portfolio performance statistics; R

Categories:Types, Research

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07/02/2013

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Addendum to ’The Analysis of a Momentum Model andAccompanying Portfolio Strategies’
Robert T. Samuel III
Draft version: 27 June 2013
1 Univariate Tests & Statistics
1.1 Jarque & Bera Test
Jarque & Bera (1987) developed a Lagrange Multiplies statistic to test for non-normalitywhich is deﬁned as
JB
=
(
√
b
1
)
2
6+(
b
2
3)
2
24
(1)where
√
b
1
is the sample skewness,
b
2
is the sample kurtosis and
is the sample size. TheJB statistic follows a
χ
22
distribution with the null hypothesis of a normality. In
R
we usethe
jarque.bera.test
function with default parameters from the the
{
tseries
}
package.
1.2 Ljung & Box Test
Ljung & Box (1978) developed a portmanteau test to determine if observations within a timeseries were independent with their Q test statistic deﬁned as
Q
=
n
(
n
+ 2)
h
k
=1
ˆ
ρ
2
k
(
n
k
)(2)where
n
is the sample size, ˆ
ρ
the sample autocorrelation and
h
the number of lags to betested. The test statistic follows a
χ
2
h
distribution with a null hypothesis that the data areindependently distributed. In
R
we use the
jbtest
function with default parameters fromthe the
{
lmtest
}
package.
1.3 Generalized Autoregressive Conditional Heteroscedasticity
If we let
t
|
Φ
t
1
(0
,h
t
) (3)
Correspondence: rtsamuel3@gmail.com
1

be a discrete, real-valued stocashtic variable then it follows a Generalized AutoregressiveConditional Heteroscedasticity (GARCH) process [Bollerslev (1986)],
h
t
=
α
0
+
q
i
=1
α
i
t
i
+
p
i
=1
β
i
h
t
i
(4)for speciﬁed values of
and
p
. In
R
we use the
garch
function with default parameters fromthe the
{
tseries
}
package.
1.4 Chow & Denning Test
Let the Variance Ratio (VR) statistic for a time series
y
t
be
VR
(
k
) =ˆ
σ
2
(
k
)ˆ
σ
2
(1)(5)where
k
is a speciﬁed lag period andˆ
σ
2
(
k
) = [
k
(
k
+ 1)(1
k
)]
1
t
=
k
(
y
t
y
t
k
ˆ
µ
)
2
(6)is the
k
-period variance estimate,ˆ
σ
2
(1) = (
1)
1
t
=1
(
y
t
y
t
1
ˆ
µ
)
2
(7)is the one-period variance estimate given a time period
, ˆ
µ
=
1
t
=1
x
t
and
x
t
=
y
t
y
t
1
.Lo & MacKinlay (1988) showed that the proper test statistic under homoscedasticity was
1
(
k
) =
VR
(
k
)
1
φ
(
k
)
12
(8)where
φ
(
k
) =2(2
k
1)(
k
1)3
kT
(9)is the asymptotic variance. In cases of heteroscedasticity they proposed
1
(
k
) =
VR
(
k
)
1
φ
(
k
)
12
(10)where
φ
(
k
) =
k
1
j
=1
2(
k
j
)
k
2
t
=
j
+1
(
x
t
ˆ
µ
)
2
(
x
t
j
ˆ
µ
)
2
÷
t
=1
(
x
t
ˆ
µ
)
2
(11)is the appropriate asymptotic variance. Given these statistics and their distributions, Chow& Denning (1993) proposed calculating
m
Variance Ratio statistics where
M
1
=
√
max
1
i
m
|
1
(
k
i
)
|
(12)2

is the appropriate test statistic under homoscedasticity and where
M
2
=
√
max
1
i
m
|
2
(
k
i
)
|
(13)is the appropriate test statistic under heteroscedasticity
1
. In
R
we use the
Chow.Denning
function with values
k
=
{
2
,
5
,
10
}
from the the
{
vrtest
}
package.
2 Multivariate Tests
2.1 Kruskal-Wallis Test
Kruskal & Wallis (1952) developed a test to determine if samples are from the same popu-lation. They proposed the test statistic of
=
12
(
+1)
i
=1
R
2
i
n
i
3(
+ 1)1
O j
=1
j
(
3
)
(14)where
is the number of samples,
n
i
is the sample size for the
i
th sample,
=
i
=1
n
i
is thetotal observations,
R
i
is the sum of the ranks for the
i
th sample,
O
is the number of groupswith ties,
t
j
the number of ties in the
j
th group and
j
=
t
3
j
t
j
. This test statistic followsa
χ
2
1
distribution with the null hypothesis that all of the samples come from the samedistribution and an alternate hypothesis that at least one sample has a diﬀerent distributionthan the other samples. Note that this test is an extension of the MWW test where
C >
2.In
R
we use the
kruskal.test
function with default parameters from the the
{
stats
}
package.
2.2 Mann-Whitney-Wilcoxon (MWW) Test
Mann & Whitney (1947) developed a test, which extended a test developed by Wilcoxon(1945), that attempted to determine if one random variable was stochastically larger thanthe other. Let
x
y
be two random variables, then the test statistic is
=
mn
+
m
(
m
+ 1)2
(15)where
m
is the sample size for
y
,
n
the sample size for x and
is the sum of the ranks of the
y
variable. The null hypothesis is that the two variables are equal with the alternatethat
x
is stochastically smaller than
y
2
. In
R
we use the
wilcox.test
function with defaultparameters from the the
{
stats
}
package.
1
Charles & Darn´e (2009) provide an overview of the diﬀerent Variance Ratio tests from which this sectionborrowed.
2
A random variable,
x
, is said to be stochastically smaller than another random variable,
y
, if
(
a
)
> g
(
a
)for any
a
and where
(
·
) and
g
(
·
) are their respective continuous cumulative distribution functions.
3