A New Test for Superior Predictive Ability

Zongwu Cai (), Jiancheng Jiang and Jingshuang Zhang

No 2013-10-14, Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University

Abstract: This paper provides a new methodology to test the superior predictive ability (SPA) of technical trading rules relative to the benchmark without potential data snooping bias. Unlike other previous methods, we explicitly approximate the covariance matrix through certain decomposition, which decreases the number of elements needed to be estimated. With the help of covariance matrix, we are able to exploit more information contained in the diagonal and off-diagonal terms and as a result, so that we improve the effectiveness of testing result. Due to the nuisance parameter in composite hypothesis, we choose the generalized likelihood ratio (GLR) test which is of uniform most power, to alleviate such problem and at the same time, to provide a pivotal distribution. Bootstrap procedure is employed in our simulation to obtain the power of the test. The result shows that the GLR test dominates the SPA test proposed by Hansen (2005) in terms of power and our GLR test is sensitive to the inclusion of superior models. Therefore, it increases the power faster than that of SPA test. The result also suggests that the GLR test is less conservative than SPA test.

Keywords: Covariance matrix estimation; Data snooping; Generalized likelihood Ratio test; Reality check; SPA test; Technical trading rules. (search for similar items in EconPapers)
Date: 2013-10-14
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published

Downloads: (external link)
https://econpub.xmu.edu.cn/research/repec/upload/20109271033307055475115776.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:wyi:wpaper:002018

Access Statistics for this paper

More papers in Working Papers from Wang Yanan Institute for Studies in Economics (WISE), Xiamen University
Bibliographic data for series maintained by WISE Technical Team ().