Objective: backtest if a specified economic indicator (and its transformation) can help forecast equity returns. To analyze this I would like to form 5 portfolio (quartile 1, 2, 3, 4, long short) in month M (made of equally weighted equity indices) based on the economic indicator rank in month M-1.
1. Provided raw data (Bloomberg live feed):
a. 10 years of monthly data of an economic indicator for several countries. The length of the data and the number of countries may change so I need to be able to change the array of raw data.
b. Monthly closing price of equity indices (for the same countries as specified in 1.a.)
2. Transform the economic data: percentage change of the economic indicator on a specified length (1, 2, 3, 6, 12 months).
3. Transform the equity index data: percentage change on a specified length (1, 2, 3, 6, 12 months).
4. Monthly quartile ranking of the transform economic data in 2.
5. Investment strategy: at the end of month 0 rank in quartile the percentage change of the economic indicator across the countries -> in month 1 buy the equally weighted portfolio of equity indices corresponding to the countries ranked in quartile 1. Same for quartile 2, 3, 4, and a long short quartile (long 1 short 4).
6. Draw the chart of those quartile portfolios to visually inspect the difference in returns of the quartiles.
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