02-29-2016 01:49 AM
Appreciate if you could help me with these questions.
When I calculate beta between a stock vs an index. R-square represents how much the index returns explain the stock price returns.
However, if I see a declining/increasing trend in RSQ (Beta could stay unchanged), how could I interpret that trend now?
Now if I calculate RSQ for all index members, sum them together and see a trend, what is the implication from the trend there?
03-01-2016 09:39 AM
My guess is RSQ represents R-Square.
Did you include more independent variables into or exclude some variables from the model? That may cause the change in R-Square.
Are you trying to measure the relationship between variables or to do forecasting? R-Sqaure measures the goodness-of-fit. If you would like to evaluate the forecasting performance, you may want to do out-of-sample test. Here is a good paper
L. J. Tashman, “Out-of-sample tests of forecasting accuracy: an analysis and review,” Int. J. Forecast., vol. 16, no. 4, pp. 437–450, 2000.
03-01-2016 09:16 PM - edited 03-01-2016 09:18 PM
Yeah, sr I didnt make it clear. RSQ is R-Square.
Totally aware of the concepts but I got some troubles interpreting the results here.
I'm doing 1 factor analysis only so I do not use many variables.
Definitely I want to do forecasting. The issue here is, if I do rolling regression day by day and see a declining trend in R-square. That seems to indicate that my independent (even though the index is not that independent) variable has less and less power in predicting the future price. Hence, what I can think of is, waiting to see when R-square is trending up to decide to reuse the model again.
Thanks for sharing the paper. I'll take a look.
In the meantime, hope someone could help clarify the sum of R-square trending issue.