Work

Endogeneity and moments in time series momentum’s predictability test

Year: 2025

Type: article

Abstract: The predictability test is critical in developing momentum trading strategies. In time-series momentum (TSM) tests via linear predictive regressions, the classical and Newey–West t-tests have size distortions because of endogeneity and a lack of enough finite moments. To tackle these issues, this paper proposes a new test that features a model of the error correlations, weighted least squares estimation, and the random weighted bootstrap method. Simulations confirm its accurate size and good power. Empirically, we revisit the evidence in (J. Financ. Econ. 135 (2020) 774–794) and find that the TSM predictability detected by the new test is much more widespread than that by the Newey–West t-tests.

Source: The Annals of Applied Statistics

DOI: 10.1214/24-aoas1983

Authors: Lei Jiang, Liang Peng, Zhongling Qin, Bingduo Yang

Institutions: Kent State University, Georgia State University, Auburn University, Guangdong University Of Finances and Economics

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

OpenAlex ID: W4408584827

FWCI: 0.931

Cites: 24

Cited by: 1

Related to: 10