Time-Varying Factor Model Components for Effective Momentum Strategy
Jamie Cross,
Lennart Hoogerheide and
Herman van Dijk
Additional contact information
Lennart Hoogerheide: Vrije Universiteit Amsterdam and Tinbergen Institute
No 24-068/III, Tinbergen Institute Discussion Papers from Tinbergen Institute
Abstract:
Determining a plausible number of components in a factor model is a nontrivial issue in case of weak data, sparse model restrictions and diffuse prior information. We discuss the issue of structural parametric identification in a static factor model and introduce orthogonal restrictions which imply that inference is independent of the order of the dependent variables. Given that financial and economic relations vary over time, we propose the use of predictive likelihoods in combination with moving window estimation in order to determine a plausible time-varying number of factor model components. Results are presented on a residual momentum strategy based on a time-varying latent factor model which outperforms a standard momentum strategy using a portfolio of US industrial stocks.
Date: 2024-11-03
References: View references in EconPapers View complete reference list from CitEc
Citations:
Downloads: (external link)
https://papers.tinbergen.nl/24068.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20240068
Access Statistics for this paper
More papers in Tinbergen Institute Discussion Papers from Tinbergen Institute Contact information at EDIRC.
Bibliographic data for series maintained by Tinbergen Office +31 (0)10-4088900 ().