Slide Idriss Tsafack CIREQ

Intraday Market Momentum : A functional
Econometric approach
By Idriss TSAFACK
UdeM
June 12, 2019
By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approachJune 12, 2019 1 / 50
Introduction
Motivation
There is a large literature documenting the succes of momentum strategy in the
financial market (Jegadeesh and Titman (1993), Griffin, Ji and Martin(2003),
Grundy and Martin, (2001), Moskowitz et al. (2012) ).
2 Categories momentum strategy:
Times Series Momentum.
Cross-sectional Momentum.
Figure: Momentum Strategy
Introduction
Motivation
The research focused most of the time on very low frequency data (Monthly or
longer).
Limitations : lower significance of the performance statistics (lower sharp

ratio, High trading cost) and it underperform in the aftermath of financial crisis
(Chan (2003)).
Only a few findings about the intraday momentum (Gao et al. (2018), Zhang et
al. (2019), Chu et al. (2019)).
Returns are usually observed as scalar =⇒ the information about the dynamics
is not used.
Opportunity : the whole dynamics of the return may contain useful informations
for return prediction.
Introduction
This Paper
Objective : Analyze how the one-day-ahead 5 minutes S&P 500 index curve is
predicted by the shape of the previous day with a fully functional autoregressive
model.
Advantages:
Use the forecasts to tactically adjust the trend identification and the market
timing for portfolio exposure within a trading day.
Take into account the dynamics between time (t-1) and (t) on very short
timeframes.
Opportunity to analyze the return predictability more broadly (How the first 5
minutes return today contribute to predict the return at any given time for the next
day).
Opportunity to introduce other tools such as derivative, acceleration of the return

curve.
Introduction
Contribution
Main Challenge : High dimensionality issues =⇒ instability of the estimated

parameters.
Suggest 4 estimations approaches to get more stable estimators : FPCA, FPLS,

FLF, FT .
Provide the consistency and asymptotic normality results of our estimations.
Comparison based on simulations and real data application.
Analyze the economic significance (Utility gain analysis) based on the identified
momentum strategy.
Introduction
Results
Based on simulation, the FLF method outperform the others in terms of

estimation of the parameter.
The 4 estimation methods tend to display the same predictive performance and
FPLS sometimes outperforms the others.
The FPLS tend to catch a remarkable R2 of 8% in the first and last hours of the
trading session, that is almost 4 times the one obtained by Gao et al.(2018) and
twice the one obtained by Zhang et al. (2019).
FPCA and FT method can reach an R2 of 5% and 6% respectively in the

morning and 2.5% in the ending hour of a trading session.
Introduction
The literature
Market Intraday Momentum: Heston et al. (2010), Gao et al. (2018), Zhang et
al. (2019), Chu et al. (2019)).
Functional Data Analysis : Besse & Cardot (2000); Ramsay and Silverman
(1997 - 2010), Ferrati & Vieu (2006); Benatia & al.(2017).
Functional Autoregressive Regression : Bosq (2000); Antoniadis and

Sapatinas (2003); Kargin and Onatski (2008); Hyndman and Shang (2009); Aue
et al. (2015), Kokoszka & Zhang (2012), Shang (2017, 2018).
Introduction
Table of contents
1 Introduction
2 The Model
3 Asymptotic results
4 Simulation results
5 Empirical data analysis
6 Conclusion
The Model
The Model
Let Pi (tj ) be the 5 minutes closing price of the S&P 500 future at time tj , on a
given day i, with j = 1, ..., 273 .
The cumulative intraday return (CIDR) is defined as
Ri (tj ) = 100 ∗ [ln(Pi (tj )) − ln(Pi (t1 ))] (1)
And the continuous curves are constructed by
X(t) = Ri (tj ) with tj ∈ (5(j − 1), 5j]. (2)
The Model
The Model
-3
price evolution within the year 2017 Univariate Instant return Functional Time series
×10
2700 1.5 1.5
2650
1
2600 1
0.5
2550
Intraday cumulative return

S&P 500 Price level
2500 0.5
Instant return
0
2450
-0.5
2400 0
2350
-1
2300 -0.5
-1.5
2250
2200 -1 -2
Jan 01, 2017 Jan 01, 2017 0 0.5 1
Time of the day Time of the day Time of the day
Figure: Intraday cumulative returns of the S&P 500 index in 2017
By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

June 12, 2019 10 / 50
The Model
The Model
We consider a fully functional Autoregressive model of order one (FAR(1)). The

predictor and response variable are both functions.
Z 1
Xi+1 (t) = Ψ(s, t)Xi (s)ds + i+1 (t), i = 1, ..., N, (3)
0
Xi (t) is the cumulative return function at time t of the day i.

i represents a day for the given sample (Xi ; i = 1,...,N ).
t ∈ (5(j − 1), 5j] represents the 5 minutes discretization within a trading day.
The intervals are normalized in [0, 1].
We are interested in the estimation of the autoregressive operator Ψ and the
forecast of the next day shape.

June 12, 2019 11 / 50
The Model
The Model
Functional Time series (day n) Functional Time series (day n+1)
1.5 1.5
1 1
0.5 0.5

0 0
-0.5 -0.5
-1 -1
-1.5 -1.5
-2 -2
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Time of the day (9:30 AM - 4:00 PM) Time of the day (9:30 AM - 4:00 PM)
Figure: Functional Predictor and Functional response

June 12, 2019 12 / 50
The Model
The model
X = (Xi ; i = 1, ..., N ) a sequence of zero-mean functional random variables

defined on the same probability space (Ω, F, P ).
H = L2 ([0, 1]) the space of all square-integrable functions mapping from [0,1] to
R.
H is a Hilbert-space endowed with an inner product < ., . > and a norm ||.||,
Z 1
which are respectively defined as follows: < f, g >= f (t)g(t)dt and
0
Z 1 1/2
||f || = f2 .
0
ε = (εi ; i = 1, ..., N ) is a sequence of functional strong white noise ( see

Kokoszka et al.(2016)). (We can also consider the martingale difference
configuration)
We assume that there exists an integer k0 ≥ 1, such that ||Ψk0 ||HS < 1.

June 12, 2019 13 / 50
The Model
The model
By premultiplying equation (3) by Xi (u) and take the expectation

on both sides we obtain:
Z 1
E[Xi (u)Xi+1 (t)] = Ψ(s, t)E[Xi (u)Xi (s)]ds + E[Xi (u)i+1 (t)]
0
Since that E[Xi (u)i+1 (t)] = 0, we obtain D = Ψ(K).

We can rewrite the problem as D∗ = K(Ψ∗ ).
Where D∗ and Ψ∗ are the adjoint of D and Ψ respectively.

June 12, 2019 14 / 50
The Model
The model
The covariance operator :
K: H →H
f → K(f ) = E[(Xi ⊗ Xi )(f )] = E[< Xi , f > Xi ]
Since that K is Hilbert-Schmidt, the spectral decomposition of K is given by

∞
X
K(s, t) = λj φj (s)φj (t) (4)
j=1
where (λj , φj )j≥1 is the eigensystem of K.
The cross-covariance operator :
D: H →H
f → D(f ) = E[(Xi ⊗ Xi+1 )(f )] = E[< Xi , f > Xi+1 ]

June 12, 2019 15 / 50
The Model
The model
Objective : Estimate Ψ and forecast Xi+1 given Xi

Main features of the model : K and D are Hilbert-Schmidt
operators.
Ψ is the parameter of interest.
D∗ = K(Ψ∗ )
We might like to say that Ψ∗ = K −1 ◦ D∗
Issue : ill-posed inverse problem, in general.
If ill-posed : =⇒ unstable estimation of Ψ and bad prediction of
Xi+1 given Xi .

June 12, 2019 16 / 50
The Model
Our estimation approaches
The 4 alternative estimation methods : Functional Principal

Component (FPCA), Functional Partial Least Squared (FPLS),
Functional Tikhonov (FT) and the Functional Landweber-Fridman (FLF)
methods.
Advantages :
Less tuning parameter to control (1 for each method).
Less costly in terms of computation.
Possibility to analyze theoretical properties of estimators (Convergence
rates and asymptotic normality).

June 12, 2019 17 / 50
The Model
Method 1 : FPCA
Project Xn+1 (t) on the first m principal components selected from the
covariance operator of the functional predictor K, φj (s).
Those principal components capture the variations on the predictor variable and
represent the eigenfunctions of K.
The estimation of the autoregressive operator is given by
∞
X
Ψ∗m (s, t) = Qm,j Ψ∗ (vj )(s)vj (t) (5)
j=1
where Qm,j = 1 if 1 ≤ j ≤ m and 0 otherwise.

The empirical version :
m Pn−1
1 i=1 Xi+1 (s)ψ̂i,j
X
Ψ̂∗m (s, t) = v̂j (t). (6)
j=1 λ̂j
n−1
Z 1
Where ψ̂i,j = [Xi (t) − X(t)]v̂j (t)dt.
0

June 12, 2019 18 / 50
The Model
Method 2 : FPLS
Z 1
At each step h = 1, ..., m, we identify a new factor fh = Xi (s)φh (s)ds such
0
that the covariance with the functional response is maximized.
Z 1 Z 1
max cov 2 Xi (s)φh (s)ds, Xi+1 (t)ch (t)dt
φh ,ch ∈L2 ([0,1]) 0 0
subject to ||φh || = 1, ||ch || = 1, and (7)

Z 1Z 1
φ` (s)K(s, t)φh (t)dsdt = 0, ` = 1, ..., h − 1
0 0
φ1 , ..., φh−1 , c1 , ..., ch−1 are already obtained in the h − 1 previous step.

June 12, 2019 19 / 50
The Model
Estimation
{φ1 , ..., φh } are the FPLS basis and are also the weights functions
associated with the FPLS components.
The estimation of the autoregressive operator is given by

∞
X
Ψ∗m (s, t) = Qm,j Ψ∗ (vj )(s)vj (t) (8)
j=1
m
Y λj
where Qm,j = 1 − Qm,j = 1 − (1 − ) and θl are the roots of
θl
l=1
the residual polynomials Qm,j .

June 12, 2019 20 / 50
The Model
Estimation
The empirical version :

n ˆ Pn−1
Qm,j

i=1 Xi+1 (s)ψ̂i,j
X
Ψ̂∗m (s, t) = v̂j (t). (9)
j=1 λ̂j
n
m
ˆ Y λ̂j
where Q m,j = 1 − Q̂m,j = 1 − (1 − ) and
l=1
θ̂l
Z 1
ψ̂i,j = [Xi (t) − X(t)]v̂j (t)dt.
0
θ̂l is the smallest eigenvalue of the Hankel matrix derived from the
estimation procedure.

June 12, 2019 21 / 50
The Model
Method 3 : Landweber iteration
Take the inital value as Ψ0 (s, t) = d ∗ D(s, t)

For each h = 1, ..., m, we have
Ψh (s, t) = (1 − dK)(Ψh−1 )(s, t) + dD(s, t) (10)
d is a positive parameter such that 0 < ||K||op < 1/d

From the estimation, we obtain :
∞
X
Ψ∗m (s, t) = Qm,j Ψ∗ (vj )(s)vj (t) (11)
j=1

m
where Qm,j = 1 − (1 − dλj )

June 12, 2019 22 / 50
The Model
Estimation
The empirical version is given by :

n ˆ Pn
Qm,j

i=1 Yi (s)ψ̂i,j
X
Ψ̂∗m (s, t) = v̂j (t) (12)
λ̂j n
j=1

ˆ m
where Qm,j = 1 − (1 − dλ̂j ) .
Alternative version
m
X
Ψ̂∗m (s, t) = d (I − dK̂)l−1 ◦ D̂(s, t) (13)
l=1

June 12, 2019 23 / 50
The Model
Method 4 : Functional Tikhonov
Another alternative approach proposed by Benatia, Carrasco and

Florens (2017)
We have
Ψ∗α (s, t) = ((αI + K)−1 ◦ D)(s, t); (14)
α is a positive parameter which converge to zero as n goes to
infinity.
From the estimation, we obtain :
∞
X
Ψ∗α (s, t) = Qm,j Ψ∗ (vj )(s)vj (t). (15)
j=1
λj
where Qm,j = .
λj + α

June 12, 2019 24 / 50
The Model
Estimation
The empirical version is given by :

n ˆ Pn
Qα,j

i=1 Yi (s)ψ̂i,j
X
Ψ̂∗m (s, t) = v̂j (t) (16)
λ̂j n
j=1
ˆ λ̂j
where Q α,j = .
λ̂j + α
Alternative version
Ψ̂∗α (s, t) = ((αI + K̂)−1 ◦ D̂)(s, t). (17)

June 12, 2019 25 / 50
Asymptotic results
Assumptions
Xi follows a FAR(1)
Z process.
A1. ||Ψ||HS < 1, X 2 (t)dt < +∞, E[||X||4 ] < ∞, E[εi |X] = 0.
S
A2. εi are strong white noises. E[ε2i |X] = σ 2 , E[ε4i |X] < +∞
∞
X < Ψ∗ , φj >2
A3. We assume that Ψ satisfies < ∞ with β ≥ 0.
j=1 λβj
A4. The eigenvalues of the covariance operators K and K̂ are distinct.
λ1 > λ2 > ... > 0 and λ̂1 > λ̂2 > ... > λ̂m .
nλm
A5. → +∞.
m

June 12, 2019 26 / 50
Asymptotic results
Asymptotic results : FPCA and FPLS
Under assumptions A1 to A5, we have

m β
M SEF P CA = Op + Op λm+1 . (18)
λm n
Under assumptions A1 to A5, if ||K||op < 1, then

m β
M SEF P LS = Op + Op λm+1 . (19)
θm n
where θm is the smallest root of the residual polynomial Q̄m,j .

June 12, 2019 27 / 50
Asymptotic results
Asymptotic results : FLF and FT
Under assumptions A1 to A4, if ||K||op < 1, then

2
m −2γ
M SEF LF = Op + Op m . (20)
n
Under assumptions A1 to A4,

if β > 1
1 min{β,2}
M SEF T = Op + Op α . (21)
nα
if β < 1
αβ

M SEF T = Op + Op α β . (22)
nα2

June 12, 2019 28 / 50
Asymptotic results
Asymptotic results
−β
If m ∼ n1/(2+2β) then M SEF LF ∼ n 1+β .
−min{β,2}
For β > 1, if α ∼ n−1/(2+2β) then M SEF T ∼ n 1+min{β,2} , (see
Benatia et al. (2017)).
For β < 1, if nα2 → ∞, M SEF T ∼ αβ .
To get more information about the optimal number of functional
components m for the FPCA and FPLS, it is necessary to set
some additional assumption on the eigenvalues.

June 12, 2019 29 / 50
Asymptotic results
Asymptotic normality : FPCA, FLF and FT
Assume that A1 to A4 (A1 to A5) for FLF and FT (for FPCA) hold, if
E(||Xi ||4 < ∞ and E(||Xi ||2 ||εi ||2 ) < ∞, then
√
n(Ψ∗δ − Ψ∗δ ) → N (0, Ωδ ). (23)
where δ = m for the FPCA and FLF and δ = α for the FT.

Ωδ = E (ε + Kδ−1 ◦ Ψδ (Xi )) ⊗ Kδ−1 (Xi )) ⊗ ¯

(ε + Kδ−1 ◦ Ψδ (Xi )) ⊗ Kδ−1 (Xi ))

− E Kδ (Ψ∗ ) ⊗ E(Xi ) ⊗E ¯ Kδ (Ψ∗ ) ⊗ E(Xi ) .

June 12, 2019 30 / 50
Simulation results
Simulation results
The following data generating process is considered

Z 1
Xn+1 (t) = Ψ(s, t)Xn (s)ds + εn+1 (t), n = 1, ..., N. (24)
0
(t2 + s2 )
Gaussian Kernel : Ψ(s, t) = C exp{− }, with C chosen
2
such that ||Ψ||HS = 0.5.
Identity operator : Ψ(s, t) = C,
Sloping plane (t) : Ψ(s, t) = Ct,
Sloping plane (s) : Ψ(s, t) = Cs
with (s, t) ∈ ([0, 1])2 and C a constant useful to normalize the
autoregressive operator.

June 12, 2019 31 / 50
Simulation results
Simulation results
3 error process configurations :

The Brownian motion (nondifferentiable) innovation :
ε(1) (t) = W (t) − tW (1), where W is the standard Wiener process
Smoothed√ and differentiable
√ √innovation :
ε(2) (t) = ξ1 2sin(2πt) + ξ2 2 λcos(2πt), where ξ1 and ξ2 are
independent standard normal and λ = 0.5.
Combo innovation : ε(3) (t) = aε(1) (t) + (1 − a)ε(2) (t), where
a ∈ [0, 1] is a real constant.
N = 50, 100, 200 and 500.
A grid of 1000 points on the interval [0,1].

June 12, 2019 32 / 50
Simulation results
Simulation results
Estimation error criteria :
s
Z 1Z 1 2
M SE = Ψ̂(s, t) − Ψ(s, t) dsdt.
0 0
Z 1Z 1
AD = Ψ̂(s, t) − Ψ(s, t)dt

0 0

Ψ̂(s, t) − Ψ(s, t)
Z 1 Z 1

RAD(Ψ) = dsdt
0 0 |Ψ(s, t)|
Prediction error criteria :
s
Z 1 2
En = X̂n (t) − Xn (t) dt
0
Z 1
Rn = X̂n (t) − Xn (t)dt

0
June 12, 2019 33 / 50
Simulation results
Simulation results
The Gaussian Kernel with brownian motion innovations
Figure: Comparison of the different estimation techniques. Gaussian Kernel

with n = 50, and ε(1)
MSE RAD AD
3
4 6
2.5
3 2
MSE
RAD
4
AD
2 1.5
2 1
1
0.5
FPCAFPLS FT FLF FPCA

FPLS FT FLF FPCA
FPLS FT FLF
Rn En
2
2
1.5
Rn
En
1.5
1
1
FPCA
FPLS FT FLF FPCA
FPLS FT FLF

June 12, 2019 34 / 50
Simulation results
Simulation results

MSE RAD AD
0.6
0.7
1.2
0.6 0.5
1
0.5
MSE
RAD
0.4
AD
0.8
0.4
0.6 0.3
0.3
0.4 0.2
0.2
FPCA
FPLS FT FLF FPCA
FPLS FT FLF FPCA
FPLS FT FLF
Rn En
1.2
1
Rn
En
1
0.8
0.6 0.8
FPCA
FPLS FT FLF FPCA
FPLS FT FLF

June 12, 2019 35 / 50
Simulation results
Simulation results
Gaussian Kernel with smooth innovations :

MSE RAD AD
2500
4000 5000
4000 2000
3000
MSE
1500
RAD
3000
AD
2000
2000 1000
1000 500
1000
0 0 0
FPCA
FPLS FT FLF FPCA
FPLS FT FLF FPCA
FPLS FT FLF
10 58 Rn 10 58 En
10
6
8
4 6
Rn
En
4
2
2
0 0
FPLS FT FLF

June 12, 2019 36 / 50
Simulation results
Simulation Results

MSE RAD AD
2000 2500
2000 1000
1500
MSE
RAD
1500
AD
1000
1000 500
500 500
0 0 0
FPCA
FPLS FT FLF FPCA
FPLS FT FLF FPCA
FPLS FT FLF
10 45 Rn 10 46 En
2
10 1.5
Rn
En
1
5
0.5
0 0
FPLS FT FLF

June 12, 2019 37 / 50
Simulation results
Simulation Results
Identity Kernel
Figure: Comparison of the different estimation techniques. Identity Kernel

MSE RAD AD
2.5
1.2
1.5
2 1
0.8
MSE
RAD
1 1.5
AD
0.6
1
0.5 0.4
0.5
0.2
FPCA
FPLS FT FLF FPCA
FPLS FT FLF FPCA
FPLS FT FLF
Rn En
4
4
3
3
Rn
En
2
2
1
1

FPLS FT FLF

June 12, 2019 38 / 50
Simulation results
Simulation results
Figure: Comparison of the different estimation techniques. Identity Kernel

MSE RAD AD
0.6 1 0.5
0.5
0.8 0.4
MSE
RAD
AD
0.4
0.6 0.3
0.3
0.4 0.2
0.2
0.2 0.1
FPCA
FPLS FT FLF FPCA
FPLS FT FLF FPCA
FPLS FT FLF
Rn En
1.1
0.9
1
0.8
Rn
En
0.7 0.9
0.6 0.8
FPCA
FPLS FT FLF FPCA
FPLS FT FLF

June 12, 2019 39 / 50
Empirical data analysis
The data
The data of S&P 500 Index future is used to analyze the intraday
returns predictability.
The available sample is from 01/01/2008 to 12/31/2017 collected
from the website www.backtestmarket.com.
Useful to control for other effects : the volatility, the volume, the
aftermath financial crisis, the macroeconomic news release effect
(Federal Open Market Committee (FOMC), Consumer Price Index
(CPI), Growth Domestic Product (GDP)), the infrequent
rebalancing.

June 12, 2019 40 / 50
The simple regression
The considered period is 2015 - 2017.

The sample size for this regression is N = 750. This sample is
split into two parts : the regression part (N 1 = 650 days) and the
Validation and testing part (N 2 = 100 days).
Z 1
Xn+1 (t) = Ψ0 (t)+ Ψ(s, t)Xn (s)ds+εn+1 (t), n = 1, ..., 650. (25)
0

June 12, 2019 41 / 50
Figure: The estimated Autoregressive operator. Year 2015 - 2017

Estimated Kernel (FPCA) Estimated Kernel(FPLS)
1 1
next day (9:30 AM - 4:00 PM)
next day (9:30 AM - 4:00 PM)

0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Current day (9:30 AM - 4:00 PM) Current day (9:30 AM - 4:00 PM)
Estimated Kernel (FT) Estimated Kernel (FLF)

1 1
next day (9:30 AM - 4:00 PM)
next day (9:30 AM - 4:00 PM)

0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
0 0
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Current day (9:30 AM - 4:00 PM) Current day (9:30 AM - 4:00 PM)

June 12, 2019 42 / 50
Results
The FT and the FLF methods display the same estimation results that are
significantly different to the one of FPCA and FPLS.
Based on the estimations using the FLF and FLF we have:
The cumulative return for the first half of the current day is positively correlated to
the next day.
The cumulative return for the second half of the current day is positively
correlated to the first half of the next day and predict negatively the second half
of the next day.

June 12, 2019 43 / 50
Figure: The estimated Functional R-Squared. Year 2015 - 2017

Functional R-squared(FPCA) Functional R-squared (FPLS)
0.05 0.08
0.04
0.06
R-squared(R2(t))
R-squared(R2(t))
0.03
0.04
0.02
0.02
0.01
0 0
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1
Functional R-squared (FT) Functional R-squared (FLF)

0.06 0.03
0.05 0.025
R-squared(R2(t))
R-squared(R2(t))
0.04 0.02
0.03 0.015
0.02 0.01
0.01 0.005
0 0
0 0.2 0.4 0.6 0.8 1 0 0.2 0.4 0.6 0.8 1

June 12, 2019 44 / 50
Results
In terms of predictive R2 we obtain
The FPLS tend to catch a remarkable R2 of 8% in the first and last hours of the
trading session, that is almost 4 times the one obtained by Gao et al.(2018) and
twice the one obtained by Zhang et al. (2019).
FPCA and FT method can reach an R2 of 5% and 6% respectively in the

morning and 2.5% in the ending hour of a trading session.
The FLF display an R2 value of 2.5% (nearly similar to the one obtained by Gao
et al.(2018)).

June 12, 2019 45 / 50
The main causes of the intraday momentum
Bogousslavski (2016) : infrequent rebalancing, late-informed effect

(slow diffusion and acceptance of news release).
Chan (2013) : market manipulation of high-frequency traders, forced
sales or purchases of assets
Renault (2017) : high-frequency investor sentiment.

Other tests : the volatility, the volume, the aftermath financial crisis, day
effect, , the macroeconomic news release effect .

June 12, 2019 46 / 50
The main causes of the intraday momentum
The regression equation is given by

Z 1
Xn+1 (t) = Ψ0 (t)+ Ψ(s, t)Xn (s)ds+ρ1 Ie,n +ρ2 Ie,n ∗Rn +εn+1 (t). (26)
0
n = 1,...,750. where Ie,n is a dummy variable taking the value 1 if the

concerned event happened at day n and 0 otherwise. Rn the cumulated
return at the closing of the day n.
ρ2 capture the interaction effect between Ie,n and Rn .

June 12, 2019 47 / 50
Conclusion
Conclusion
Forecasting the shape of the stock market could be very useful to

analyze the return predictability.
We use a novel approach (Functional autoregressive model).
This approach can help investors to optimize on their investment
strategy and portfolio rebalancing.
The FLF method tend to outperform the others in terms of
estimation of the parameters.
It is possible to reach remarkable value of the predictive R2 (up to
8%).
simulations and empirical analysis are promising.

June 12, 2019 48 / 50
Conclusion
Still ongoing
Run the robustness check of our empirical analysis (day effect,

High volatility day effect, Macroeconomic news effect, High
Volume day effect, financial crisis effect ...)
Economic significance analysis : Examine the performance of the
identified investing strategy.

June 12, 2019 49 / 50
Conclusion
THANKS FOR YOUR KIND ATTENTION

June 12, 2019 50 / 50

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Intraday Market Momentum : A functional

June 12, 2019

2 Categories momentum strategy:

Times Series Momentum.

Figure: Momentum Strategy

Limitations : lower significance of the performance statistics (lower sharp

Opportunity to introduce other tools such as derivative, acceleration of the return

Main Challenge : High dimensionality issues =⇒ instability of the estimated

Suggest 4 estimations approaches to get more stable estimators : FPCA, FPLS,

Provide the consistency and asymptotic normality results of our estimations.

Comparison based on simulations and real data application.

Based on simulation, the FLF method outperform the others in terms of

FPCA and FT method can reach an R2 of 5% and 6% respectively in the

Functional Autoregressive Regression : Bosq (2000); Antoniadis and

5 Empirical data analysis

The cumulative intraday return (CIDR) is defined as

Ri (tj ) = 100 ∗ [ln(Pi (tj )) − ln(Pi (t1 ))] (1)

And the continuous curves are constructed by

X(t) = Ri (tj ) with tj ∈ (5(j − 1), 5j]. (2)

Intraday cumulative return

Figure: Intraday cumulative returns of the S&P 500 index in 2017

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

We consider a fully functional Autoregressive model of order one (FAR(1)). The

Xi (t) is the cumulative return function at time t of the day i.

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

Intraday cumulative return

Figure: Functional Predictor and Functional response

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

X = (Xi ; i = 1, ..., N ) a sequence of zero-mean functional random variables

ε = (εi ; i = 1, ..., N ) is a sequence of functional strong white noise ( see

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

By premultiplying equation (3) by Xi (u) and take the expectation

Since that E[Xi (u)i+1 (t)] = 0, we obtain D = Ψ(K).

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

The covariance operator :

Since that K is Hilbert-Schmidt, the spectral decomposition of K is given by

where (λj , φj )j≥1 is the eigensystem of K.

The cross-covariance operator :

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

Objective : Estimate Ψ and forecast Xi+1 given Xi

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

Our estimation approaches

The 4 alternative estimation methods : Functional Principal

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

where Qm,j = 1 if 1 ≤ j ≤ m and 0 otherwise.

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

subject to ||φh || = 1, ||ch || = 1, and (7)

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

The estimation of the autoregressive operator is given by

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

The empirical version :

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

Method 3 : Landweber iteration

Take the inital value as Ψ0 (s, t) = d ∗ D(s, t)

Ψh (s, t) = (1 − dK)(Ψh−1 )(s, t) + dD(s, t) (10)

d is a positive parameter such that 0 < ||K||op < 1/d

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

The empirical version is given by :

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

Method 4 : Functional Tikhonov

Another alternative approach proposed by Benatia, Carrasco and

By Idriss TSAFACK UdeM Intraday Market Momentum : A functional Econometric approach

The empirical version is given by :

Ψ̂∗α (s, t) = ((αI + K̂)−1 ◦ D̂)(s, t). (17)

Since that E[Xi (u)i+1 (t)] = 0, we obtain D = Ψ(K).