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Hi all,
I would like to hear your thoughts on how you would approach a simple question: does this event / signal have some kind of predictive power on prices?
I get asked similar questions a lot in my day to day and have a simple approach to answer that:
1. Given a signal, I compute the dates in which it breaches an intuitive threshold (it can be below / above a certain threshold)
2. From that dates, look at the subsequent returns of prices (1 day to 1 month for example), and see how they are distributed (average, sharpe, hit ratio, ...)
One possible improvement would be comparing the return distribution vs the one of the entire period, to see if the two have a different average using Anova, but Anova needs assumptions on the normality of the returns, same volatility, ... and also my observations can be limited, so I don't have strong confidence in the results.
I am conscious that this isn't proper research, it doesn't answer the questions of what threshold to use, how to trade the signal or how to optimize a portfolio around it, but I'm curious to hear your thoughts.
Do you have any ideas to share? |
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