A Latent Factor Model for Ordinal Data to Measure Multivariate Predictive Ability of Financial Market Movements

In this paper we develop,a structural equation,model,with latent variables in an ordinal setting which,allows us to test broker-dealer predictive abil- ity of financial market,movements.,We use a multivariate,logit model,in a latent factor framework, develop a tractable estimator based on a Laplace approximation, and show its consistency and asymptotic normality. Monte Carlo experiments,reveal that both the estimation method,and the testing procedure,perform,well in small samples. An empirical illustration is given for mid-term forecasts simultaneously,made,by two broker-dealers for several countries. Key words: structural equation model, latent variable, generalised lin-