This action might not be possible to undo. Are you sure you want to continue?

BooksAudiobooksComicsSheet Music### Categories

### Categories

### Categories

### Publishers

Scribd Selects Books

Hand-picked favorites from

our editors

our editors

Scribd Selects Audiobooks

Hand-picked favorites from

our editors

our editors

Scribd Selects Comics

Hand-picked favorites from

our editors

our editors

Scribd Selects Sheet Music

Hand-picked favorites from

our editors

our editors

Top Books

What's trending, bestsellers,

award-winners & more

award-winners & more

Top Audiobooks

What's trending, bestsellers,

award-winners & more

award-winners & more

Top Comics

What's trending, bestsellers,

award-winners & more

award-winners & more

Top Sheet Music

What's trending, bestsellers,

award-winners & more

award-winners & more

P. 1

Addendum to 'the Analysis of a Momentum Model and Accompanying Portfolio Strategies'|Views: 5|Likes: 0

Published by Robert T. Samuel III

Statistical tests; portfolio performance statistics; R

Statistical tests; portfolio performance statistics; R

See more

See less

https://www.scribd.com/doc/150888774/Addendum-to-the-Analysis-of-a-Momentum-Model-and-Accompanying-Portfolio-Strategies

07/02/2013

text

original

**Accompanying 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-normality

which is deﬁned as

JB = N

_

(

√

b

1

)

2

6

+

(b

2

− 3)

2

24

_

(1)

where

√

b

1

is the sample skewness, b

2

is the sample kurtosis and N is the sample size. The

JB statistic follows a χ

2

2

distribution with the null hypothesis of a normality. In R we use

the 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 time

series 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 be

tested. The test statistic follows a χ

2

h

distribution with a null hypothesis that the data are

independently distributed. In R we use the jbtest function with default parameters from

the the {lmtest} package.

1.3 Generalized Autoregressive Conditional Heteroscedasticity

If we let

t

|Φ

t−1

∼ N(0, h

t

) (3)

∗

Correspondence: rtsamuel3@gmail.com

1

be a discrete, real-valued stocashtic variable then it follows a Generalized Autoregressive

Conditional 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 q and p. In R we use the garch function with default parameters from

the the {tseries} package.

1.4 Chow & Denning Test

Let the Variance Ratio (VR) statistic for a time series y

t

be

V R(k) =

ˆ σ

2

(k)

ˆ σ

2

(1)

(5)

where k is a speciﬁed lag period and

ˆ σ

2

(k) = [k(T − k + 1)(1 −

k

T

)]

−

1

T

t=k

(y

t

− y

t−k

− ˆ µ)

2

(6)

is the k-period variance estimate,

ˆ σ

2

(1) = (T − 1)

−

1

T

t=1

(y

t

− y

t−1

− ˆ µ)

2

(7)

is the one-period variance estimate given a time period T, ˆ µ = T

−

1

T

t=1

x

t

and x

t

= y

t

−y

t−1

.

Lo & MacKinlay (1988) showed that the proper test statistic under homoscedasticity was

M

1

(k) =

V R(k) − 1

φ(k)

1

2

(8)

where

φ(k) =

2(2k − 1)(k − 1)

3kT

(9)

is the asymptotic variance. In cases of heteroscedasticity they proposed

M

1

(k) =

V R(k) − 1

φ

∗

(k)

1

2

(10)

where

φ

∗

(k) =

k−1

j=1

_

2(k − j)

k

_

2

_

T

t=j+1

(x

t

− ˆ µ)

2

(x

t−j

− ˆ µ)

2

_

÷

_

T

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

MV

1

=

√

T max

1≤i≤m

|M

1

(k

i

)| (12)

2

is the appropriate test statistic under homoscedasticity and where

MV

2

=

√

T max

1≤i≤m

|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

H =

12

N(N+1)

C

i=1

R

2

i

n

i

− 3(N + 1)

1 −

O

j=1

T

j

(N

3

−N)

(14)

where C is the number of samples, n

i

is the sample size for the ith sample, N =

C

i=1

n

i

is the

total observations, R

i

is the sum of the ranks for the ith sample, O is the number of groups

with ties, t

j

the number of ties in the jth group and T

j

= t

3

j

− t

j

. This test statistic follows

a χ

2

C−1

distribution with the null hypothesis that all of the samples come from the same

distribution and an alternate hypothesis that at least one sample has a diﬀerent distribution

than 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 than

the other. Let x ad y be two random variables, then the test statistic is

U = mn +

m(m + 1)

2

− T (15)

where m is the sample size for y, n the sample size for x and T is the sum of the ranks of

the y variable. The null hypothesis is that the two variables are equal with the alternate

that x is stochastically smaller than y

2

. In R we use the wilcox.test function with default

parameters from the the {stats} package.

1

Charles & Darn´e (2009) provide an overview of the diﬀerent Variance Ratio tests from which this section

borrowed.

2

A random variable, x, is said to be stochastically smaller than another random variable, y, if f(a) > g(a)

for any a and where f(·) and g(·) are their respective continuous cumulative distribution functions.

3

3 Ordinary Least Squares (OLS) Diagnostic Tests

3.1 Equal Variances

If we deﬁne = Y −Xβ as the residuals from an OLS estimator, then one of the assumptions

of Gauss-Markov theorum is that the variance should be constant, formally noted as

V (

i

) = σ

2

< ∞ (16)

where V (·) is the variance estimator and σ

2

= V ar(Y )

3

. If hetereoscedasticity is present

then our standard errors will be incorrect and we can not make accurate inferences about the

statistical signiﬁcance of the parameter estimates from OLS. The Breusch & Pagan (1979)

test statistic is of the form

BP = nR

2

(17)

where n is the sample size of the original regression equation to be analyzed and R

2

represents

the square of the coeﬃcient of determination from the auxiliary regression

e

2

i

= γ

0

+ γ

1

z

1,i

+ ... + γ

p

zp, i + η

i

(18)

where e

i

represents the residual, z

p,i

represents an independent variable from the original

regression and p is the number of independent variables from the original regression. The

test statistic from (17) follows a χ

2

(p−1)

distribution with a null hypothesis of homoscedasticity

and in R we use the bptest function with default parameters from the the {lmtest} package.

3.2 Autocorrelated Errors

Another assumption of the Gauss-Markov theorum is that the ’s are uncorrelated, formally

noted as

cov(

t

,

s

) = 0, ∀t = s (19)

where cov(·) is the covariance estimator. The Breusch & Godfrey (1978) test statistic is of

the form

BG = nR

2

(20)

where n is the sample size of the original regression equation to be analyzed and R

2

represents

the square of the coeﬃcient of determination from the auxiliary regression

ˆ

Y

t

= α

0

+ α

1

X

1,t

+ ... + α

k

X

k,t

+ ρ

1

ˆ µ

t−1

+ ... + ρ

p

ˆ µ

t−p

+

t

(21)

where

ˆ

Y is an estimate of the independent variable, X

k

is a dependent variable and ˆ µ an

estimate of the residual all from the original regression and p is a speciﬁed number of lags

to be tested. The null hypothesis is of no autocorrelation with a χ

2

p

distribution and in R

we use the bgtest function with default parameters from the the {lmtest} package.

3

Formally, if all three assumptions of the Gauss-Markov theorem are met than the OLS estimator is the

Best Linear Unbiased Estimator (BLUE) and no other estimator has a greater eﬃciency.

4

3.3 Non-normality of Errors

Although Gauss-Markov does not assume normality of the error terms, the Maximum Like-

lihood Estimator (MLE) is no longer the Uniformly Minimum Variance Unbiased Estimator

(UMVUE) if the error terms are non-normal. For our purposes, we use the Jarque-Bera test

to test for normality of our OLS residuals.

4 Portfolio Performance Statistics

4.1 Sharpe Ratio

The Sharpe Ratio, Sharpe (1966), is deﬁned as

SR =

E[R

p

− R

rf

]

V ar[R

p

− R

rf

]

(22)

where R

p

represents the return of a portfolio and R

rf

is the appropriate risk-free rate

4

4.2 Omega

Formally, if we let F be the speciﬁed CDF for a data series, x, which is deﬁned on the range

(a, b) then

Ω(τ) =

_

b

L

1 − F(x)dx

_

L

a

F(x)dx

(23)

is the Omega statistic for a speciﬁed threshold τ [Keating & Shadwick (2002)]. Given that we

do not know a priori the distribution of our data series, we take a non-parametric approach

to estimate F via kernel density estimation techniques of which Li & Racine (2007) provide

an excellent overview. In particular, we are interested in estimating the leave-one-out kernel

density estimator

ˆ

F

−i

(x) =

n

j=i

G(

x−Xj

h

)

(n − 1)

(24)

where G(x) =

_

x

−∞

k(v)dv is the CDF for a speciﬁed kernel k(·) and h is the bandwidth size.

For our analysis we select the Gaussian kernel which we deﬁne as

k

h

(x) = exp

_

−

x − X

j

2

2h

2

_

(25)

where · is the Euclidean norm

5

. In R we use the density() function, with a bandwidth

of ”bw.nrd” and default parameters, to estimate

ˆ

f(·), the probability density function (pdf)

4

Note, in his original formulation, Sharpe did not include the risk-free rate in the calculation of the

statistic as it was assumed to be constant. In a later formulation, he updated his statistic to allow for a

’benchmark’ which could vary with time and was not necessarily a risk-free asset.

5

The Epanechnikov is asymptotically the most eﬃcient kernel; however, it can be ill-behaved in some

situations. In addition, the Gaussian kernel is about 5% less eﬃcient than the Epanechnikov kernel so there

isn’t a great loss in eﬃciency [Wand & Jones (1995, p.31)].

5

of x. With this pdf estimate we use the approxfun() to approximate the CDF with zero

probabilities given to those values outside the range of x. Next we use the integrate()

function to evaluate the two integrands, with (a, b) = (−∞, ∞), and estimate our Omega

statistic as their ratio

6

. It should be noted that all of the listed functions reside within the

base {stats} package of R.

4.3 Maximum Drawdown (MaxDD)

The ’Max Drawdown’ (MDD) statistic is deﬁned as

MDD = max

t∈[0,T]

[ max

s∈[0,t]

W(s) − W(t)] (26)

where W(t) is the wealth of a portfolio at time t. A heuristic viewpoint of MDD is that it

attempts to quantify the amount of money a strategy could lose before it corrects itself and

is a complimentary statistic to the cumulative returns for a strategy. Magdon-Ismail et al

(2004) provide an excellent overview of some of the properties of the Maximum Drawdown

for Geometric Brownian Motions (GBM).

4.4 Jensen’s α

Let us deﬁne Jensen’s α, Jensen (1968), for the jth asset as the parameter derived from the

probabilistic model

˜

R

j,t

− R

F,t

= α

j

+ β

j

[

˜

R

M,t

− R

F,t

] + ˜ µ

j,t

(27)

where

˜

R

j,t

is the return of the jth portfolio at time t given a model & strategy combination,

R

F,t

is the appropriate risk-free rate and

˜

R

M,t

is the return of the market portfolio.

References

[1] Bollerslev, T. (1986) ’Generalized Autoregressive Conditional Heteroskedasticity,’ Journal of

Economics 31, 307-327

[2] Breusch, T. and Pagan, A. (1979) ’A Simple Test for Heteroscedasticity and Random Coeﬃ-

cient Variation,’ Econometrica 47, 1287-1294

[3] Breusch, T. (1979) ’Testing for Autocorrelation in Dynamic Linear Models,’ Australian Eco-

nomic Papers 17, 334-355

[4] Charles, A. and Darn´e, O. (2009) ’Variance-Ratio Tests of Random Walk: An Overview,’

Journal of Economic Surveys 23(3), 503-527

[5] Chow, K. and Denning, K. (1993) ’A Simple Multiple Variance Ratio Test,’ Journal of Econo-

metrics 58, 385-401

6

Given that, due to approximation, the sum of the two integrands may not equal 1, we use the property

that

_

b

L

1 − F(x)dx is the complimentary CDF of

_

L

a

F(x)dx to evaluate the numerator in Ω(τ).

6

[6] Godfrey, L.G. (1978) ’Testing Against General Autoregressive and Moving Average Error

Models when the Regressors Include Lagged Dependent Variables,’ Econometrica 46, 1293-

1302

[7] Jarque, C. and Bera, A. (1987) ‘A Test for Normality of Observations and Regression Resid-

uals,’ International Statistical Review 55(2), 163-172

[8] Jensen, M. (1968) ’The Performance Of Mutual Funds In The Period 1945-1964,’ The Journal

of Finance 23(2), 389-416

[9] Keating, C. and Shadwick, W. (2002) ’A universal performance measure,’ Journal of Perfor-

mance Measurement 6(3), 59-84

[10] Kruskal, W. and Wallis, W. (1952) ’Use of Ranks in One-Criterion Variance Analysis,’ Journal

of the American Statistical Association 47(260), 583-621

[11] Li, Q. and Racine, J. Nonparametric Econometrics. Princeton: Princeton University Press

(2006)

[12] Ljung, G. and Box, G. (1978) ’On a Measure of Lack of Fit in Time Series Models,’ Biometrika

65, 297-303

[13] Lo, A. and MacKinlay, A. (1988) ’Stock Market Prices do not Follow Random Walks: Evidence

from a Simple Speciﬁcation Test,’ The Review of Financial Studies 1(1), 41-66

[14] Magdon-Ismail, M., Atiya, A., Pratap, A. and Abu-Mostafa, Y. (2004) ”On the Maximum

Drawdown of the Brownian Motion”, Journal of Applied Probability 41(1)

[15] Mann, H. and Whitney, D. (1947) ’On a Test of Whether one of Two Random Variables is

Stochastically Larger than the Other,’ Annals of Mathematical Statistics 18(1), 50-60

[16] Sharpe, W. (1966) ’Mutual Fund Performance,’ The Journal of Business 39(1), 119-138

[17] Wand, M. and Jones, M. Kernel Smoothing. London: Chapman & Hall (1995)

[18] White, H. (1980) ’A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct

Test for Heteroskedasticity,’ Econometrica 48(4), 817-838

[19] Wilcoxon, F. (1945) ’Individual Comparisons by Ranking Methods,’ Biometrics Bulletin 1(6),

80-83

7

Results of a Proprietary Model Applied to Commodity Futures

The Analysis of a Momentum Model and Accompanying Portfolio Strategies

For the Love of Hacking

An Analysis of Value at Risk Methods for U.S. Energy Futures

- Read and print without ads
- Download to keep your version
- Edit, email or read offline

Are you sure?

This action might not be possible to undo. Are you sure you want to continue?

CANCEL

OK

You've been reading!

NO, THANKS

OK

scribd

/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->