Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2024-11-03
Number: 24-068/III
Author-Name: Jamie Cross
Author-Workplace-Name: Melbourne Business School
Author-Name: Lennart Hoogerheide
Author-Workplace-Name: Vrije Universiteit Amsterdam and Tinbergen Institute
Author-Name: Herman van Dijk
Author-Workplace-Name: Erasmus University Rotterdam and Tinbergen Institute
Title: Time-Varying Factor Model Components for Effective Momentum Strategy
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.
Classification-JEL: 
Keywords: 
File-URL: https://papers.tinbergen.nl/24068.pdf
File-Format: application/pdf
File-Size: 652.898 bytes
Handle: RePEc:tin:wpaper:20240068